Implieds rise once again, with UST selloff
Treasuries are lower to start the week as a milder version of the bear steepening has ensued today after the strong post-NFP rally on Friday broke up the previous week’s strong bear steepening trend. Implieds are back higher in a right side led move. 3m expiries are around unchanged on the left side versus an up to 4.5 normal gain on the right. 1y expiries are last roughly unchanged to up 1.5 normals in the belly.
The directionality of volatility remains intact, with vols generally rising versus underlying selloffs and has been following skew with exception of the ULC which remains receivers over, sources note. At this point, looking at the level of delivered volatility versus the implieds, one source wondered “can the level of volatility be sustained? Or will it go quiet?”
In trading activity today, 6m1y versus 6m2y dealt as a switch at 69bps and 153bps, respectively, 6m10y traded at 550bps, 1m10y dealt at 226.5bps, a switch of 2y10y versus 2y30y traded at 1023bps and 1907.5bps, respectively, 1m30y traded at 435bps, and 7y10y dealt at 1537bps and early on 20y10y traded at 1825bps. In other switches, 3y20y versus 1y20y traded at 1810bps and 1140bps, respectively, and 3m10y versus 3m30y dealt at 393bps and 742bps, respectively.
In skew a 200bps wide strangle versus straddle may have dealt in 1y30y at 332bps and 1410bps, according to the SDR.
Pros and cons for vol direction cancelling out – JP Morgan
Analysts at JP Morgan see “offsetting influences of delivered vol (which we expect to remain elevated) and implieds (which we think could decline on the back of lower yields and a potential Fed pause).”
Indeed, the bank continues to believe that delivered volatility “could remain high, thanks to considerable Fed policy path uncertainty (which creates conditions that can sustain elevated jump risk), as well as seasonally low market depth in August.”
On the other hand, “even as delivered volatility appears likely to remain high, implieds could drift lower,” JP Morgan judges. For example, the bank noted the week prior that “a decomposition of delta hedged long straddle returns in most sectors showed that gamma P/L (net of theta) was positive, but declining implieds can prove to be a sufficient headwind to push overall returns into negative territory as was the case for the month of July in several sectors.”
“The risk of a fall in implieds is especially significant currently, it warns. “For one, normal basis point implied volatility remains well correlated with ATMF yield levels, and we now look for tactical declines in yields in the near term,” and given last week’s “sizeable rise in implieds even after adjusting for the move in yields, a potential decline in yields could bring an even larger downdrift in implied vols, making implieds very susceptible to a pull-back to lower yields,” JP Morgan assesses.
Therefore, given these opposing effects, the bank favors staying neutral on swaption volatility on an outright basis.
New structured notes
For a complete review of USD MTN activity over the past week, please see USD MTNs.
- Credit Agricole sold a $50m 15y NC9 zero coupon callable (non-Formosa). The note matures Aug 2038, is callable annually from Aug 2032 and has an estimated IRR of 6.02%. Self-led and announced Aug 4.
- Bank of America is working on a self-led step-up callable maturing Aug 2038 NC3 that pays 5.6% to Aug 2029, 6% to Aug 2034 and 6.5% thereafter. Domestic MTN.
- Bank of America is working on a self-led fixed callable maturing Aug 2028 NC1 that pays 5.8%. Domestic MTN.
- Bank of America is working on a self-led fixed callable maturing Aug 2033 NC2 that pays 5.8%. Domestic MTN.
- Citigroup is working on a self-led floating callable maturing Aug 2030 NC3m that pays 2y SOFR. EMTN.
- Nomura is working on a self-led fixed callable maturing Aug 2028 NC1 that pays 5.5%. EMTN.
- HSBC is working on a self-led step-up callable maturing Feb 2025 NC1 that pays 4.6% to Feb 2024, 4.65% to Aug 2024 and 4.7% thereafter. Eurodollar.
- HSBC is working on a self-led fixed callable maturing Aug 2028 NC1 that pays 6.02%. Eurodollar.
- UBS is working on a self-led $10m fixed callable maturing Aug 2024 NC6m that pays 5.88%. EMTN.
- UBS is working on a self-led $10m fixed callable maturing Aug 2025 NC1 that pays 6.03%. EMTN.
- Wells Fargo is working on a self-led step-up callable maturing Aug 2033 NC1 that pays 5.75% to Aug 2024, 5.9% to Aug 2025 and 6.2% thereafter. Domestic MTN.
- Wells Fargo is working on a self-led fixed callable maturing Aug 2028 NC1 that pays 5.9%. Domestic MTN.
- Wells Fargo is working on a self-led fixed callable maturing Aug 2033 NC2 that pays 5.9%. Domestic MTN.
- Standard Chartered is working on a self-led fixed callable maturing Jul 2024 NC1m that pays 7.77%. EMTN. Credit linked.
- Standard Chartered is working on a self-led fixed callable maturing Feb 2024 NC1m that pays 8.99%. EMTN. Credit linked.