Vols sway higher then lower with upper range test
Treasuries have bear flattened in a rocky session that has seen the 10y yield gyrate from 4.15% to 4.21% and back again to 4.15% and now last at 4.18%. The 2y note yield is 7.5bps higher on the day at 4.976% last. The vol surface shunted higher this morning with the breach in the upper end of the range, but are now off the highs of the day.
3m expiries were 2.5 to 5.5 normals higher on the day this morning but are now around 1 to 3 normals firmer last, with the belly leading throughout. 1y expiries are last around unchanged to up a normal, after seeing gains this morning of roughly 1-4 normals. The longer expiries are around 0.2 to 0.5 normal higher after rising as much as 1.5 normals earlier.
Overall, vols have been very sensitive to the underlying selloff, especially as the upper end of the range is threatened to be breached. Nervousness and anxiety levels rise with the approach of the upper bound, sources say, and thus vols quickly become better bid, sources note. “Supply remains the big story and the concerns over China’s economic outlook could spell even less demand for US bonds,” one source remarked.
In interbank activity today, 2y2y traded at 297bps and 296bps, 1y2y traded at 227bps and 226bps, 6m2y versus 3m2y traded as a switch at 148.5bps and 96.5bps, respectively, 1y5y traded at 467bps and 1y1y traded up at 114bps and 115bps this morning and 3m2y dealt at 99bps while 6m1y traded at 67bps.
In longer tails, 1m10y dealt at 227bps, 1m30y traded at 427bps, 1y20y versus 2y20y dealt at 1152bps and 1572bps, respectively, 4y20y versus 1y25y traded at 1980bps and 1283bps, respectively, 6m10y traded at 544bps, 15y10y traded at 1725bps and 1y10y traded this morning at 753bps, according to the SDR.
In skew, a 6m1y straddle versus 200bps wide strangle may have dealt at 67 versus 30.75bps, respectively, according to the SDR.
Stay with 1y1y payer spreads – Barclays
In conditional space, analysts at Barclays maintain its long in 1y1y payer spreads, funded by selling low strike receivers. The bank’s core thesis for vol markets is “for a convergence of views about the path of Fed policy over the next few years.”
Barclays points out that “forecast dispersions around the 1yf level of short-term rates was historically high in Q2 23,” but “as the economy continues to display resilience, and inflation remains on track, we believe that there will likely be more convergence of views among market participants, and the probability of sharp cuts priced by the market should fall,” it argues.
As a result, Barclays believes that this “should compress vol, but also cause 1y1y rates to roll up over time.”
Further, the bank thinks there is “quite a bit of downside risk that is priced into vols on short tenor rates” as the Bloomberg median 12m recession probability forecast is “still at 60% or “in other words, the median forecaster believes that there is a 60% probability of a recession over the next 12 months.”
“Despite upside surprises in growth over the last few months, this probability is only 5% lower than where it was after the peak of the SVB crisis,” Barclays highlights.
Moreover, “the high downside risk premium can also been seen in swaption skew” as the ATM+50/ATM-50 skew for various <1 expiries and various “is quite negative—low strike receivers are rich to payers” and “the sign of the skew is opposite to the realized dynamics in the market —ATM implied volatility has tended to rise on days when rates increase, and fall when rates fall,” Barclays points out.
To be sure, Barclays notes that “ATM implied volatility has recently tended to rise on days when rates increase and fall when rates fall.” Compared with realized dynamics, “skew in some parts of the vol surface is the most inverted it has been” and thus Barclays judges that “the skew is still pricing for a very high probability of an SVB-like event to reoccur, even though vol has tended to rise with rising rates recently” and Barclays sees “the associated left hand side tail is also contributing to elevated levels of short tenor vols like 1y1y.”
New structured notes
For a complete review of USD MTN activity over the past week, please see USD MTNs.
- Standard Chartered is working on a self-led $21m fixed callable maturing Aug 2028 NC2 that pays 5.95%. EMTN.
- JP Morgan is working on a self-led fixed callable maturing Aug 2028 NC1 that pays 5.8%. 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 2028 NC1 that pays 6%. Domestic MTN.
- Bank of America is working on a self-led fixed callable maturing Aug 2038 NC2 that pays 6.05%. Domestic MTN.
- Citigroup is working on a self-led fixed callable maturing Aug 2035 NC1 that pays 5.5%. Domestic MTN.
- Credit Suisse is working on a self-led fixed callable maturing Aug 2024 NC1m that pays 6.85%. Also putable Aug 2023. Eurodollar.
- CIBC is working on a self-led fixed callable maturing Sep 2033 NC3 that pays 7%. EMTN.
- UBS is working on a self-led fixed callable maturing Aug 2025 NC3m that pays 5.2%. EMTN.
- UBS is working on a self-led fixed callable maturing Aug 2025 NC1 that pays 5.77%. EMTN.
- UBS is working on a self-led fixed callable maturing Aug 2025 NC1 that pays 5.41%. EMTN.
- UBS is working on a self-led step-up callable maturing Aug 2025 NC1 that pays 5.67% to Aug 2024 and 5.69% thereafter. EMTN.
- UBS is working on a self-led fixed callable maturing Aug 2025 NC1 that pays 6.04%. EMTN.
- UBS is working on a self-led fixed callable maturing Aug 2025 NC1 that pays 6.07%. EMTN.
- Bank of Montreal is working on a self-led fixed callable maturing Aug 2025 NC6m that pays 5.75%. Domestic MTN.
- National Bank of Canada is working on a fixed callable via Citi maturing Aug 2028 NC3 that pays 5.085%. Putable Feb 2024. EMTN.