USD Vol: Gamma lifts despite lower realizeds

Gamma lifts despite lower realizeds

Another rocky session has seen yields higher then lower and now back near unchanged with realizeds  +/-2.5bps. Gamma is up on the day, led by the ULC, and have stayed higher despite the drop in realizeds this afternoon. For example, 3m expiries are marking anywhere from 2 to 4 normals higher on the day, led by the left. Further out 1y expiries are last roughly 0.2 to 1.2 normals higher, led by the right.

The choppy price action in rates/vol are suggestive of increasing illiquidity as the last summer hurrah of two weekers by trading staff are likely cycling through, sources suggest. In the current conditions, “whoever can push the markets to their liking, and only some are privy to the moves," and otherwise outside of these flows the market "goes dead,” remarked one source.

In interbank activity today, 2m1y traded at 38bps, 1m2y dealt at 57bps, 1y2y traded at 227bps and 226bps, 1m5y traded at 139bps and 139.5bps, 3m5y dealt at 237bps, 1y5y traded at 475bps, 1m10y traded at 231bps and 230bps, 3m10y dealt at 393bps, 6m10y dealt at 547bps and 549bps, 1y10y dealt at 771bps and 2y10y traded at 1039bps - the highs of the day – and 6m25y dealt at 960bps along with some 1y25y at the start of the session at 1305bps, according to the SDR.  

In CFS, some 2x3 CFS ATM versus 200bp high may have traded at 164bps and 29bps, respectively and a 200bp wide collar may have also dealt (44bps for low strike and 49.5bps for the high strike). 2x3 CFS may also have dealt at 164bps, 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.

Buy 3m30y risk reversal, delta-hedged - Citigroup

Analysts at Citigroup find that “while right-side vol has outperformed sharply against left-side vol” amid the recent bear steepening, “upper-right payer skews have increased only slightly and remain undervalued.”

In examining a scatter plot of the observed 3m10y swaption vols at the realized forward rates since the beginning of Q2, Citigroup finds that it “shows that the 3m10y ATMF vol has certainly increased sharply over the past two weeks and it is consistent with the previously observed rate and vol levels” but at the same time “the slope of the skew remains nearly unchanged and is too flat, i.e. the current payer skew is only pricing for modest increase in the 3m10y swaption vol in a higher rate scenario that would still fall short of where they were just a few weeks earlier.”

At the same time, Citigroup points out that “receiver skew appears to be overvalued given that implied vols could collapse in a rate rally just like they did a few weeks earlier when yields were stuck in the middle of their range.”

Looking at the results of the bank’s skew fair value model, the bank finds that “the upper-right risk reversals, especially on 30y tails, are the most undervalued on the surface,” with, for example, 3m30y risk reversal “more than 1 standard deviations cheap relative to our model fair value and historically the spread to fair value tends to mean revert when it reaches this level.”

“One way to position for a further steepening in the 3m30y skew is to be long the 3m30y risk reversal with the delta hedged by receiving fixed in a swap on a weekly basis,” Citigroup suggests.

“As we have previously noted, the soft landing narrative, worries about UST supply, Powell’s signaling of more QT to come, and the BoJ’s surprise loosening of the YCC policy are all reasons for anxious investors to hedge for the yields breakout risk by owning OTM payers on intermediate and long-end US rates,” it recalls, and further Citigroup argues “this concern for higher yields breakout is unlikely to abate quickly now that we have  tested and definitely breached the upper-end of the recent yield range.”

New structured notes

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

• Korea Development Bank sold a $50m 20y NC5 zero coupon callable (non-Formosa). The GMTN matures Aug 2043, is callable annually from Aug 2028 and has an estimated IRR of 5.50%. Lead is GS and announced Aug 14.

   

• Standard Chartered is working on a self-led fixed callable maturing Aug 2028 NC1 that pays 5.9%. EMTN.

   

• Citigroup is working on a self-led fixed callable maturing Aug 2028 NC2 that pays 5.28%. EMTN.

   

• Citigroup is working on a self-led fixed callable maturing Sep 2024 callable Feb 2024 that pays 5.78%. Domestic MTN.

   

• IBRD is working on a $14m fixed callable via Nomura maturing Aug 2033 NC1 that pays 6.17%. Eurodollar.

   

• Goldman Sachs is working on a self-led fixed callable maturing Aug 2026 NC1 that pays 6%. Domestic MTN.

   

• Goldman Sachs is working on a self-led fixed callable maturing Aug 2028 NC1 that pays 6.1%. Domestic MTN.

   

• Goldman Sachs is working on a self-led fixed callable maturing Aug 2033 NC2 that pays 6%. Domestic MTN.

   

• JP Morgan is working on a self-led $10m fixed callable maturing Aug 2033 NC3 that pays 5.85%. Domestic MTN.

   

• JP Morgan is working on a self-led fixed callable maturing Aug 2032 NC2 that pays 6%. Domestic MTN.

   

• Toronto Dominion is working on a self-led fixed callable maturing Aug 2024 NC9m that pays 6%. CD format. Domestic.

   

• Bank of Montreal is working on a self-led $20m floating putable maturing Aug 2028 putable Feb 2024 that pays O/N SOFR +122bps. EMTN.  

   

• Ford Motor Credit is working on a fixed callable via Incap maturing Aug 2025 NC1 that pays 6.8%. Domestic MTN.  

   

• Ally Financial is working on a fixed callable via InspereX maturing Aug 2028 NC6m that pays 7.2%. Domestic MTN.