USD Vol: Vol surface slumps with underlying rally

Down chart candlestick 11 Jun 2020
Implieds are lower in a directional move after today's softer NFP. After some early lifts higher prior to NFP, vols sunk post-data, led by the belly.

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  • Vol surface slumps with underlying rally

  • ULC receiver skew still a premium, but costly – BNP Paribas  

  • New structured notes


    Vol surface slumps with underlying rally

    Treasuries have rallied back in the wake of a softer NFP after four consecutive days of bear steepening - some amid high realizeds. The vol surface is lower across the board today, with the belly of the curve leading the softening in shorter expiries.


    3m expiries are last around 1 to 6 normals lower on the day, with the most pressure in 5y to 10y tails. 1y expiries are roughly 2 to 3.5 normals lower, led by the left side and belly.


    At the start of the session, prior to NFP, implieds saw a couple of lifts that marked vols a touch higher before the print. For example, 1y30y traded up at 1435bps and then down at 1425bps, while 1y25y dealt at 1307bps, or roughly 0.75 normal higher, but are now both lower by around 2 normals.


    Amid the strong swings this week in underlying rates, a source noted that brokers have had a tough time readjusting some of the marks on the vol surface as “ratios in vol have changed” and a result “some of the ratios don’t make a lot of sense,” leading the source suggest that the “brokers don’t have a clue where to mark some parts of the surface.”


    In interbank activity today, 1y2y traded at 220bps, 1m5y traded at 135bps and last up at 137bps, 1m10y traded at 239bps prior to the NFP data, then traded down at 218bps last.  1y1y dealt at 112bps, 3m2y traded at 107bps, 6m10y traded at 546bps versus 1y10y at 760bps, and then 6m10y traded down outright later at 543bps, according to the SDR.


    In longer expiries, 5y10y dealt at 1410bps, 10y10y dealt at 1625bps, 7y30y traded at 2918bps, 3y20y dealt at 1780bps, and a switch of 4y2y versus 7y2y traded at 356bps and 407bps, respectively.


    In skew, a 2y10y 100bp each way risk reversal may have dealt at +59bps, and a 1y20y 50bp each way risk reversal may have dealt at +39bps and then +45bps, 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.



    ULC receiver skew still a premium, but costly – BNP Paribas  

    Examining the state of the ULC skew over the past month, analysts at BNP Paribas highlight that “receivers remain at a premium to payers in the ULC despite continuing to dramatically underperform when we measure fixed strike skew.”


      “Notably, 3m2y fixed strike vols fell every day in July when its forward rate fell while 1y2y vol underperformed in 80% of rallies and outperformed on 80% of selloffs. Indeed, outperformance to higher rates and underperformance to lower rates generally extended across the surface, but it is particularly costly in the ULC given skew valuations.”


    Thus, BNP Paribas judges “market participants with the flexibility to rebalance both delta and vega risk as rates move up and down may benefit by buying risk reversals in the ULC, in our view.”


    Elsewhere, the bank favors to holding on to its short 18m2y straddles, delta hedged, and at the time of writing, “the trade is about breakeven in terms vol level and gamma versus theta and, while we continue to see this sector of the vol curve as elevated, we are increasingly cognizant of the ability of the slope of the money market curve to support vols,” the bank notes.


    “For swaption vols in this sector of the curve to fall more materially (and remain lower), the market may need to continue to reduce rate cut pricing,” BNP Paribas finds.


    New structured notes

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


    • Goldman Sachs is working on a self-led fixed callable maturing Aug 2028 NC3 that pays 5.7%. Domestic MTN.


    • JP Morgan is working on a self-led fixed callable maturing May 2033 NC2 that pays 6%. Domestic MTN.


    • Barclays is working on a self-led CMS steepener maturing Aug 2033 NC1 that pays a TBD fixed coupon for the first year, then pays 6*(CMS2y/10y), floored at zero. EMTN.


    • Standard Chartered is working on a self-led fixed callable maturing Aug 2025 NC1m that pays 5.58%. Credit linked. EMTN.