Expected 25bps hike hits vol surface lower, led by ULC
The Fed hiked 25bps and pledged to go meeting by meeting, assessing the need for further tightening. Powell called recent data encouraging and hoped inflation would continue on “a lower path” with moderate growth and labor demand versus supply equalizing further. Powell stressed that “a more gradual pace” does not translate into tightening “every other meeting.”
The vol surface dropped into and out of the FOMC statement. 3m expiries are last around 1.3 to 4 normals, with the softening led by the left side, while 1y expiries are down roughly 0.3 to 2 normals, also led by the left.
After the FOMC statement release, 2y1y traded at 147bps after trading earlier pre-FOMC at 148bps. and 1m10y traded at 192bps after trading at 194bps prior to the FOMC.
In other trading activity before the FOMC, in the ULC 1y1y traded at 115.5bps, 3m1y traded at 41bps, 6m1y dealt at 70bps and 1m2y traded at 65bps versus 3m2y at 110bps, according to the SDR.
In addition in CFS, 6mx9m caplet traded at 14bps, 2x3 CFS dealt at 154bps and 1x2 CFS traded at 138.375bps, 138.5bps, 138bps and 137.75bps and a 200bps 2x4 wide collar also may have dealt at 162bps versus 98.5bps, according to the SDR.
As for skew, a 3m10y 25bps each way risk reversal traded at +3bps, according to the SDR.
Longer expiries will stay supported – Barclays
Further out the term structure, analysts at Barclays think that vol is “likely to be supported”:
- “First, term premia are likely to rise on fiscal deficits. Second, the resilience in the economy suggests a view that neutral rates are higher. Third, in recent days, as the market has increasingly viewed the hiking cycle as coming to an end, it has also repriced longer-term inflation expectations higher. 5y5y CPI swaps, for example, are now at the higher end of their range over the past year, suggesting higher odds that the Fed may end the cycle too soon.”
Barclays continues to recommend “buying 2y5y payer spreads to position for this dynamic.”
- Finally, we think that the prospect of hedging demand at these rate levels, both from rallies and sell-offs, from end-users with longer tenor hedging needs (such as mortgage hedgers, insurance and pension funds) should likely continue to support vega in longer tenors (but not necessarily gamma).
That said, the bank’s main bias remains “to position for short-gamma/long vega expressions especially in sectors where hedging demand may become a real issue in a rally (such as buying 3y10y low strikes funded by selling shorter expiry receivers) or through RHS option triangles such as 10y20y+3m10y vs 3m30y with equal notionals.”
New structured notes
For a complete review of USD MTN activity over the past week, please see USD MTNs.
- IBRD sold a $10m 20y NC1 fixed callable. The EMTN matures Aug 2043 and is callable annually starting Aug 2024 and pays a coupon of 6.05%. Lead WFS. Announced Jul 25.
- Societe Generale is working on a fixed callable maturing Aug 2028 NC1 that pays 5.5%. Lead N/A. Domestic MTN.
- JP Morgan is working on a self-led fixed callable maturing Aug 2026 NC1 that pays 4.3%. EMTN.
- JP Morgan is working on a self-led fixed callable maturing Aug 2025 NC1 that pays 5.51%. EMTN.
- JP Morgan is working on a self-led fixed callable maturing Jul 2026 NC2 that pays 5.25%. Domestic MTN.
- JP Morgan is working on a self-led fixed callable maturing Oct 2028 NC4.5 that pays 5.5%. Domestic MTN.
- Citigroup is working on a self-led fixed callable maturing Aug 2025 NC6m that pays 5.1%. Domestic MTN.
- UBS is working on a self-led step-up callable maturing Jul 2025 NC6m that pays 5.38% to Jul 2024, and 5.39% thereafter. Domestic MTN.
- Bank of Montreal is working on a self-led USD extendible with initial maturity Jan 2024 and then extendible to Jul 2025 that pays 6%. Domestic MTN.
- Standard Chartered is working on a self-led fixed callable maturing Nov 2023 NC1m that pays 6.73%. EMTN. Credit linked.
- Standard Chartered is working on a self-led fixed callable maturing May 2024 NC1m that pays 6.95%. EMTN. Credit linked.
- Standard Chartered is working on a self-led fixed callable maturing Feb 2024 NC1m that pays 7.32%. EMTN. Credit linked.
- Standard Chartered is working on a self-led fixed callable maturing Aug 2024 NC1m that pays 7.06%. EMTN. Credit linked.