Implieds pop higher, led by right side
The selloff in USTs snowballed this afternoon as yields climbed as much as 14.5bps in a bear steepening move after a weaker 7y auction followed stronger data, and longs began to capitulate as the selloff expanded, sources say. The vol surface has jumped higher, with initially the upper left leading the move, but more recently, strong lifts on the right side have propelled further gains on the right.
3m expiries are anywhere from 2.5 to 9 normals firmer, led by the 10y tail, while 1y expiries are roughly 3 to 4.5 normals firmer, led by the 10y as well. Longer expiries are also gaining – with vols up 1.2 to 2.5 normals.
Earlier this morning, a big lift in in 6m1y at 72bps got the ball rolling on the left side bid, sources say, and this afternoon 3m10y was lifted up at 370bps (with the market 360/370bps) suddenly shifted the vol gains to the right. 3m10y earlier in the day traded at 345bps (this morning), then dealt at 352bps, then 358bps before 370bps last, sources note.
Meanwhile, 1y1y 1x2 wedge traded at 29bps in decent size and the 1y1y 100bp each way risk reversal traded at -7bps, according to the SDR. In longer expiries, 10y10y traded at 1537bps, 1540bps and then up at 1558bps, and 1y10y traded at 715bps and 5y20y at 2014bps.
One source felt that it made sense that the right side was gaining today versus the left, as the Fed is likely finished soon with hikes and the uncertainty moves further out the curve. Plus the delivered volatility today of well in excess of 10bps is a “big move” and brings rates back to toward the upper end of the range, the trader highlighted.
Sell 5y10y versus 9m30y – JP Morgan
In recent research, on a relative basis, JP Morgan recommends selling 5y10y straddles versus buying 9m30y straddles. “This 1:1 vega weighted straddle switch is positively correlated to the (1y1y minus 1y10y) tail curve and negatively correlated to the (1y1y minus 10y1y) expiry curve, with roughly comparable betas in magnitude, and currently appears rich relative to this empirical relationship,” the bank finds.
“The roughly offsetting betas with respect to the expiry and tail curves is fortuitous - these vol surface measures are themselves well correlated and have traded in wide ranges during this Fed regime, and although we expect both measures to eventually decline, they are likely to remain highly variable in the near term,” JP Morgan highlights.
“Thus, this vol switch allows investors to position for a correction in relative value, while mitigating exposure to a broader reshaping of the vol surface driven by shifting Fed expectations and policy uncertainty,” the bank adds.
New structured notes
For a complete review of USD MTN activity over the past week, please see USD MTNs.
- JP Morgan is working on a self-led CMS steepener maturing Aug 2026 NC1 that pays 9% to Aug 2024 and then pays 8*(CMS2y/CMS10y). EMTN.
- Morgan Stanley is working on a self-led fixed callable maturing Aug 2033 NC1 that pays 5.5%. Domestic MTN.
- Morgan Stanley is working on a self-led fixed callable maturing Aug 2028 NC2 that pays 5.25%. Domestic MTN.
- Goldman Sachs is working on a self-led $20m floating callable maturing Aug 2033 NC5 that pays O/N SOFR +2.02%. EMTN.
- Citigroup is working on a self-led fixed callable maturing Aug 2024 NC6m that pays 5%. Domestic MTN.
- BNP Paribas is working on a self-led fixed callable Sukuk maturing Feb 2024 NC1m that pays 4.81%. EMTN.
- Royal Bank of Canada is working on a self-led fixed callable maturing Aug 2030 NC5 that pays 5.5%. Domestic MTN.
- Bank of Montreal is working on a self-led fixed callable maturing Aug 2028 NC6m that pays 5.5%. CD format. Domestic.
- Societe Generale is working on a self-led fixed callable maturing Aug 2028 NC1 that pays 5.5%. EMTN.
- Standard Chartered is working on a self-led fixed callable maturing Feb 2024 NC1m that pays 7.9%. EMTN. Credit linked.
- 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 Feb 2024 NC1m that pays 7.32%. EMTN. Credit linked.
- Macquarie Bank is working on a self-led $50m fixed callable maturing Aug 2033 nC3 that pays 5.3%. EMTN.