Right side lags vs. left; 3m10y risk reversals
Treasuries have sold off after the FOMC minutes stated that “most participants continued to see significant upside risks to inflation.” Vols off of the lows of the day but remain lower on the right side with longer tails underperforming amid the roughly 3bps selloff.
3m expiries are anywhere from 2.5 normals lower to 1.5 normals higher, in a right to left move as short tails are higher vs the right. 1y expiries in contrast at roughly unchanged on the day and further out, longer expiries are creeping upwards by around 0.5 normal.
Today saw some skew trade, with 3m10y 50bps each way risk reversals dealing at +13bps and then down at +11.5bps, according to the SDR.
Other interbank activity was centered around the more liquid 10y tails for the most part, with a smattering of ULC. Starting with ULC, 1y1y traded at 115.5bps and earlier at 115bps, 6m2y traded at 153bps and 3m2y dealt at 100bps. In a wedge, 2y1y versus 2x3 CFS traded at 22bps, and may have included a 200bps high cap at 29.25bps, according to the SDR.
Meanwhile in 10y tails, in switches, 1m10y versus 3m10y traded at 228bps and 393bps, respectively, and also at 225.5bps and 385bps, later in the day. 1m10y traded at 227bps, 3m10y also dealt at 384bps (the low of the day), 6m10y traded at 545bps and also traded versus 3m10y as a switch at 544bps and 385bps, respectively. Elsewhere, a fly of 6m10y/1y10y/2y10y traded at 545bps, 760bps and 1031bps, respectively.
In long expiries, 7y20y traded at 2345bps, 10y10y versus 5y30y traded at 1635bps and 2670bps, respectively, and 10y30y traded at 3220bps, according to the SDR.
Fed on hold longer, curve trades – Barclays
Analysts at Barclays look at key themes seen from swaption SDR data over the past two weeks. First, Barclays finds that “after a quiet July, swaption volume over the past two weeks has returned to its annual average, driven by increased activity in the top right, as there was a repricing of the term premium.” Overall, the bank sees that the vol bias is “neutral despite a brief pickup in buying around the August refunding announcement.”
Volumes in 1m10y and 1m30y straddles – the bank’s proxy for systematic vol selling - “have increased after payrolls, but are at relatively low levels compared to history,” Barclays highlights.
Secondly, Barclays sees the swaption market shows investors have “a bearish bias in short tenors,” noting that payer-based structures seen on the SDR “tend to focus on the very short end, such as 3m1y ATM vs ATM+25 vs ATM+50 payer spreads and 1y1y ATM vs ATM+100 payer spreads” and suggests “investors may be positioning for one or two more hikes and the Fed being on hold for longer.”
Meanwhile, “receiver-based structures tend to be in longer tenors, such as 1m10y ATM-20 vs ATM vs ATM+20 seagull,” it finds. Overall, Barclays sees “an increase in investors expressing directional views via swaption structures.”
Lastly, Barclays points out that curve expressions through swaptions have picked up via activity in conditional curve structures (bear or bull steepeners, or flatteners). “These include curve structures such as 1m5y vs 1m20y with low strike receivers and 1y10y vs 1y30y with high strike payers,” the bank finds.
New structured notes
For a complete review of USD MTN activity over the past week, please see USD MTNs.
- ING sold a $50m 20y NC8 zero coupon callable (non-Formosa). The EMTN matures Aug 2043, is callable annually from Aug 2031 and has an estimated IRR of 6.00%. Lead is unconfirmed and announced Aug 16.
- Standard Chartered is working on a self-led $18m fixed callable maturing Aug 2030 NC2 that pays 6.06%. EMTN.
- JP Morgan is working on a self-led fixed callable maturing Aug 2025 NC1 that pays 5.55%. EMTN.
- Bank of America is working on a self-led $50m fixed callable maturing Sep 2033 NC4 that pays 5.8%. EMTN.
- Citigroup is working on a self-led fixed callable maturing Aug 2026 NC1 that pays 5.75%. Domestic MTN.
- Citigroup is working on a self-led fixed callable maturing Aug 2030 NC18m that pays 5.75%. Domestic MTN.
- Citigroup is working on a self-led fixed callable maturing Aug 2028 NC1 that pays 5.85%. Domestic MTN.
- HSBC is working on a self-led $16.29m step-up callable maturing Mar 2025 NC1 that pays 4.6% to Mar 2024, 4.65% to Aug 2024 and 4.7% thereafter. Eurodollar.
- UBS is working on a fixed callable via Lego maturing Aug 2025 NC1 that pays 5.42%. EMTN.
- UBS is working on a fixed callable via Lego maturing Aug 2024 NC6m that pays 5.43%. EMTN.
- UBS is working on a fixed callable via Lego maturing Aug 2024 callable Jul 2024 that pays 5.38%. EMTN.
- Toronto Dominion is working on a self-led $175m floating callable maturing Sep 2024 callable Jun 2024 that pays O/N SOFR +65bps. CD format. Domestic.
- Royal Bank of Canada is working on a self-led fixed callable maturing Aug 2028 NC2 that pays 5.75%. GMTN.
- Royal Bank of Canada is working on a self-led fixed callable maturing Aug 2024 callable May 2024 that pays 5.6%. GMTN.
- Bank of Montreal is working on a self-led fixed callable maturing Aug 2028 NC1 that pays 5.9%. Domestic MTN.
- Bank of Montreal is working on a self-led fixed callable maturing Aug 2028 NC1 that pays 6.1%. Domestic MTN.
- Dow Chemical is working on a fixed callable via InspereX maturing Aug 2033 NC6m that pays 5.5%. Domestic MTN.
- Dow Chemical is working on a fixed callable via InspereX maturing Aug 2053 NC6m that pays 6.1%. Domestic MTN.
- Dow Chemical is working on a fixed callable via InspereX maturing Aug 2028 NC6m that pays 5.2%. Domestic MTN.