Directionality tested as implieds rise
Euro implieds moved higher across the belly and right-hand side of the grid today, despite yields falling sharply.
In the underlying, the 10y Bund future rallied 1.5 points while the 10y yield declined 15bps to 2.45% to wipe out all of August’s selloff. The move occurred after an overnight rally in USTs and a decline in the ECB survey’s consumer inflation expectations. Risk assets also fell with the Euro Stoxx -1.2%.
“The shift from left to right is becoming more entrenched and at the expense of directionality,” felt one euro vol trader. Previously, implieds tended to decline as yields fell and vice versa.
Today it was 30y gamma that led the gains in implieds with 1m30y up 5.4 normals at 91.3, around 20 normals higher this August and nearing the July highs as 30y swaps fell by around 12bps. By contrast, the top left was unmoved by the latest rally with 1y1y marked unchanged at 112.8nvol.
“Personally, I think it has more to go,” said one euro vol trader when asked if the shift from left to right can continue. “But there could be some cutting back (on positions) after the most recent move,” he felt.
Take profit on 2s/10s vol steepener - JPM
In its latest rates weekly JP Morgan takes profit on its 2s/10s vol curve steepener held as short gamma proxy at the short end of the curve. The bank writes:
- “Since we recommended the trade the implied volatility curve steepened 0.9bp/day from -1bp/day to -0.2bp/day with the spread of delivered staying positive with 10y tails outdelivering 2y tails by 0.9bp/day.
- “Given the repricing of implieds we believe that the upside from further steepening of the implied volatility curve across tails appears more limited.
- “Although we believe that the ECB outlook over the short term should still help the trade via delivered volatility staying higher in the belly of the course. We tactically take profit in 2s/10s volatility curve steepener across tails.”