USD Vol: Implieds gain modestly, led by the left

Implieds gain modestly, led by the left

Realized volatility has been low today and is within 2bps across the curve. The intraday range is around 5bps. The implied vol surface is off the earlier highs with gamma seeing a modest firming, led by the left side. 3m expiries are around 1 to 3 normals higher on the day while 1y expiries are anywhere from 0.5 normal lower on the right to 2 normals higher on the left.

Some of the firming of the right side versus the left side thus has faded after a nascent boost to the right side was seen late last week - after the underlying curve saw a strong and high realized bear steepening move. One source noted that some of the persistence of the outperformance on the left side has been relayed to “the lack of supply in the ULC” and “dealers are always being asked to offer the ULC.” 

With these flows, dealers have been going on the exchange to buy or buying on the OTC to cover, and with the last resort buying the more expensive CFS vol, the source remarked.

Trading activity today, however, has seen limited ULC trades, with 6m1y going through at 68.5bps, 1y1y at 116bps and 3m1y at 40.5bps. Further out, in a switch, 2y2y versus 2y10y traded at 283bps and 976bps, respectively.

5y tails saw 2y5y at 601bps and then at 604bps, possibly versus 1y5y at 449bps, 3y5y versus 3y3y traded at 697bps and 463bps, respectively, and some 1y5y traded outright at 450bps, according to the SDR.

In longer tails, 2m10y traded at 292bps, 1m10y traded at 203bps, 6m10y dealt at 510bps, 1y10y versus 4y10y traded at 713bps and 1258bps, respectively, 1m30y traded at 333bps and 331bps and in long er expiries, 10y20y dealt at 2415bps.

In skew, a 1m10y 50bp each way risk reversal traded at +3.75bps, according to the SDR.

For USD option trades on the SDR see here and for volumes please see here.  Note that the Total Derivatives SDR now shows broker/platform information for each trade, where available.

Elevated vol examined – Barclays  

Analysts at Barclays delve into why interest rate volatility has been higher than their historical averages in 2023. Indeed, “elevated levels of rate volatility in particular stand out as showing a very different picture of the balance of risks compared to volatility in other asset classes” as “volatilities in other asset classes are well below their historical averages, but rate volatility has remained stubbornly high through 2023.”

“Common market discourse often ascribes the elevated level of realized volatility either to ‘uncertainty’ or to market factors such as ‘illiquidity’ or “positioning’” but Barclays highlights “it is not clear why the rates market would perceive a much higher level of uncertainty than, say equities, or why market conditions in rates would be that much more adverse than other asset classes.”

With this backdrop, Barclays presents a framework to explain rate volatility as well as decompose it into quantifiable “macro dispersion” and “market conditions” factors.

Historically, Barclays finds that “market factors together represent the biggest contributor to realized volatility in very short tenors” and 4Q ahead “belief dispersion matters the least for 1y tenors when compared to market variables, suggesting that the market has a fair bit of certainty about the near-term path of policy, leaving exogenous shocks to drive short tenor volatility.”

“However, in tenors longer than 1y, the contribution from macro forecast dispersion becomes much more prominent,” the bank highlights, such that “over the last cycle, the macro-related factors have been the main driver of the rise in volatility.”

Indeed, “forecast dispersion (macro factors) have been a much bigger driver keeping volatility elevated since 2022, compared to the market factors,” it finds. Looking ahead, Barclays points out that “the underlying variables seem to indicate the beginning of a downward trend that has not actually been reflected in short tenors” or “in other words, it increasingly looks like realized volatility, especially in short tenors, is now too high relative to the fundamentals.”

Going forward, Barclays suggests “if visibility emerges around the end of this hiking cycle, and a disinflationary soft landing becomes more probable, this could cause forecast dispersions to decline.”

For example, “if forecast dispersions for policy rates, 10y yields and inflation were at their average for the past decade, by our estimates, 10y realized volatility could be 20bp/y lower and 3m10y implied volatility could be c. 25bp/y lower than it is currently,” Barclays assesses. 

New structured notes

For a complete review of USD MTN activity over the past week, please see USD MTNs.

• Cathay Life sold a $113m 10y fixed bond Formosa. The EMTN matures Aug 2033 and pays a coupon of 6.1%. Non-callable. Lead KGI. Announced Jul 31.

   

• Morgan Stanley is working on a self-led step-up callable maturing Aug 2026 NC1 that pays 5.15% to Aug 2024, 5.3% to Aug 2025 and 5.5% thereafter. CD format. Domestic.

   

• Morgan Stanley is working on a self-led fixed callable maturing Feb 2027 NC2 that pays 5%. Domestic MTN.

   

• Goldman Sachs is working on a self-led $20m floating callable maturing Aug 2033 NC5 that pays O/N SOFR +2.07%. EMTN.

   

• Goldman Sachs is working on a self-led fixed callable maturing Aug 2026 NC6m that pays 6.05%. Domestic MTN.

   

• Goldman Sachs is working on a self-led fixed callable maturing Aug 2028 NC2 that pays 5.8%. Domestic MTN.

   

• JP Morgan is working on a self-led fixed callable maturing Aug 2026 NC6m that pays 5.65%. Domestic MTN.

   

• JP Morgan is working on a self-led fixed callable maturing Aug 2030 NC2 that pays 5.75%. Domestic MTN.

   

• JP Morgan is working on a self-led fixed callable maturing Aug 2027 NC1 that pays 5.7%. Domestic MTN.

   

• JP Morgan is working on a self-led fixed callable maturing Aug 2033 NC2 that pays 5.75%. Domestic MTN.

   

• JP Morgan is working on a self-led fixed callable maturing Aug 2028 NC1 that pays 5.7%. Domestic MTN.

   

• JP Morgan is working on a self-led fixed callable maturing Aug 2028 NC1 that pays 5.75%. Domestic MTN.

   

• Citigroup is working on a self-led fixed callable maturing Aug 2028 NC1 that pays 5.34%. EMTN.

   

• Citigroup is working on a self-led fixed callable maturing Aug 2025 NC1 that pays 5.17%. EMTN.

   

• Citigroup is working on a self-led fixed callable maturing Aug 2028 NC1 that pays 5.7%. Domestic MTN.

   

• Citigroup is working on a self-led fixed callable maturing Aug 2030 callable Feb 2025 that pays 5.65%. Domestic MTN.

   

• Citigroup is working on a self-led fixed callable maturing Feb 2025 NC6m that pays 5.75%. Domestic MTN.

   

• Citigroup is working on a self-led fixed callable maturing Sep 2024 NC6m that pays 5.8%. Domestic MTN.

   

• Deutsche is working on a self-led fixed callable maturing Jun 2026 NC1 that pays 6.07%. EMTN. Credit-linked.

   

• Toronto Dominion is working on a self-led USD extendible with initial maturity Aug 2024 and then extendible to Aug 2028 that pays 5.75% to Aug 2024, then pays 5.95%, 6.15%, 6.35% and 6.55%, stepping up annually. Domestic MTN.   

   

• Bank of Montreal is working on a self-led fixed callable maturing Aug 2025 NC6m that pays 6%. Domestic MTN.  

   

• Wells Fargo is working on a self-led fixed callable maturing Aug 2033 NC2 that pays 5.8%. Domestic MTN.

   

• Wells Fargo is working on a self-led fixed callable maturing Aug 2028 NC1 that pays 5.85%. Domestic MTN.

   

• Wells Fargo is working on a self-led step-up callable maturing Aug 2026 NC1 that pays 5.7% to Aug 2024, 5.9% to Aug 2025 and 6.15% thereafter. Domestic MTN.