USD Vol: Right side boosted with curve steepening

Right side boosted with curve steepening

Treasuries have continued to explore the upper end of the yield range in the back end of the curve, as yields have risen 1.5 to 8.5bps on the day in a bear steepening move. The underlying steepening has resulted in the vol surface shifting toward the right, with intermediate and longer tails firming relative to the left side.

The right is “definitely” getting a boost today, with the steepening “driving things today,” noted one source. That said, the trader pointed out “net of the last two days it’s actually still a little weaker relative to 2s5s,” with, for example, FV breakevens “back to 9bp/day” which the source felt was “pretty wild.”

3m expiries are last anywhere from 1.7 to 4.2 normals higher on the day, led by the right and 1y expiries are anywhere from around -0.6 normal lower for 1y1y to roughly 2.5 normals firmer on the day for 1y30y.

Meanwhile, very long expiries are firmer as well, with 5y and 10y expiries anywhere from 0.7 to 1.2 normals higher on the day. A big trade in 20y5y at 1030bps helped to push longer expiries higher, sources concur.

In other trading activity, 1m10y traded at 207bps, 211bps, and 215bps, 3m10y dealt at 357bps and 1y10y dealt at 724bps and then 726bps, 1y1y traded at 115bps, 2y2y traded at 285bps, and earlier 1m5y traded at 140bps and 6m5y at 333bps this morning.

In switches, 3m20y versus 3m10y dealt at 517bps and 365bps, respectively, and 2y10y versus 2y2y dealt at 980bps and 285bps, and 6m30y versus 3m30y dealt at 935bps and 645bps, respectively. In longer expires, 7y20y dealt at 2245bps, 15y10y dealt at 1667bps and 10y10y at 1565bps, and 4y2y at 350bps, according to the SDR. In CFS, a 3x5 cap 3.35% strike dealt at 345bps and 346bps, according to the SDR.

In skew, a 100bps wide strangle/straddle traded at 95bps and 358bps, respectively, and was bid on the follow, sources say.

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.

10y tail skew examined; 10y vs 2y – Citigroup

Analysts at Citigroup find that “with inflation worries moderating and the soft landing narrative gaining traction, the directionality of the curve to rates, especially in rate sell-offs, has started to shift in recent weeks.”

“With inflation moderating this year and the economy remaining surprisingly robust, the market is no longer expecting more aggressive Fed tightening to suppress growth, which has resulted in a much more neutral rate/curve directionality,” the bank explains. 

“If the recent change in the rate/curve directionality persists, the implied vol spread between the 2y and the 5y tails would have to narrow, which has been happening in recent weeks,” it notes. For example, “the 3m5y/3m2y vol ratio has historically tracked the 1m realized beta of 3m fwd 2s5s curve to 3m5y rate, and a continuing rebound in that beta back to zero should be accompanied by further increase in the 3m5y/3m2y vol ratio towards 1,” Citigroup highlights.

For 2s10s, “the repricing would have to happen in both the ATM vols and the skews to effectively address the different rate/curve directionality in rate rallies and sell-offs” where “specifically, the payer skews on the 10y tails would have to further outperform the payer skews on the 2y tails until the outright vols on the two OTM payers converge to reflect the neutral rate/curve directionality when yields move higher,” the bank finds.

“A steeper risk reversal skew on the 10y would also be consistent with the recently observed higher implied vols as yields approach the upper end of their recent range and threaten to break out, “ it adds.

Looking at a scatter plot of the observed 3m10y swaption vol and forward rate since the beginning of April, Citigroup sees that currently the 3m10y vol “is still lower than where it was recently at this rate level” and furthermore, “the current payer skew is only pricing for modest increase in the 3m10y swaption vol in a higher rate scenario that would fall short of where they were just in prior weeks.”

Hence at these levels, Citigroup is “no longer bearish on upper-right payer skews and see room for further increase.”

Finally, the bank finds “BoJ’s surprise loosening of the YCC policy by allowing the JGB 10y yield to rise above the cap by a certain degree should indirectly help widen the right side of the distribution for US 10y rate.” Further, “investors are also viewing this adjustment as a step in the BoJ’s road to eventual normalization, and the need to hedge for such a scenario by owning OTM payers on intermediate US rates should help vols on the US 10y tail to outperform vols on the 2y tail and provide further support for the 10y payer skew,” it suggests.

New structured notes

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

• Merrill Lynch sold a $80m 10y NC4 fixed callable Formosa. The EMTN matures Aug 2033, is callable annually from Aug 2027 and pays a 5.5% coupon. Leads are Cathay, KGI and Yuanta. Announced Jul 31.

   

• Goldman Sachs sold a $15m 15y NC2 zero coupon callable (non-Formosa). The EMTN matures Aug 2038, is callable annually from Aug 2025 and has an estimated IRR of 5.00%. Self-led and announced Aug 1.

   

• IBRD is working on a $14m fixed callable via JPM maturing Aug 2033 NC1 that pays 6.05%. EMTN.  

   

• Goldman Sachs is working on a self-led fixed callable maturing Aug 2026 NC1 that pays 5.8%. Domestic MTN.

   

• JP Morgan is working on a self-led fixed callable maturing Aug 2033 NC1 that pays 6%. Domestic MTN.

   

• Merrill Lynch is working on a self-led fixed callable maturing Aug 2034 NC3 that pays 5.15%. EMTN.

   

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

   

• BNP Paribas is working on a self-led fixed callable maturing Jun 2028 NC2 that pays 5.75%. EMTN.  

   

• Credit Agricole is working on a self-led fixed callable maturing Aug 2028 NC1 that pays 6%. EMTN.

   

• Credit Agricole is working on a self-led CMS ranger maturing Aug 2028 that pays 7%*days CMS1y is 0-6%. EMTN.

   

• Toronto Dominion is working on a self-led $20m fixed callable maturing Jul 2024 NC1 that pays 6%. CD format. Domestic.  

   

• Royal Bank of Canada is working on a self-led fixed callable maturing Aug 2033 NC2 that pays 5.8%. GMTN.

   

• Royal Bank of Canada is working on a self-led fixed callable maturing Aug 2027 NC1 that pays 5.5%. GMTN.

   

• Standard Chartered is working on a self-led fixed callable maturing Aug 2024 NC1m that pays 7.54%. EMTN.

   

• Ford Motor Credit is working on a fixed callable via Incap maturing Aug 2026 NC1 that pays 6.5%. Domestic MTN.   

   

• Ford Motor Credit is working on a fixed callable via Incap maturing Aug 2033 NC1 that pays 6.75%. Domestic MTN.   

   

• Verizon Communications is working on a fixed callable via InspereX maturing Aug 2030 NC1 that pays 5.15%. Domestic MTN.   

   

• Verizon Communications is working on a fixed callable via InspereX maturing Aug 2053 NC1 that pays 5.5%. Domestic MTN.   

   

• Dow Chemical is working on a fixed callable via InspereX maturing Aug 2053 NC6m that pays 5.7%. Domestic MTN.   

   

• Dow Chemical is working on a fixed callable via InspereX maturing Aug 2028 NC6m that pays 5.1%. Domestic MTN.   

   

• Dow Chemical is working on a fixed callable via InspereX maturing Aug 2033 NC6m that pays 5.3%. Domestic MTN.