USD Vol: Right side gains; ULC lifts early

Right side gains; ULC lifts early

The steepening of the curve has continued this afternoon, though hasn’t been a one way move with some retracement. Realizeds on the back end of the curve are around 5bps on the spot curve and amplified to the 10bps range for the forwards, with for example, 5y5y out 10bps today to a new high of 4.11%. The vol surface is higher, with the right side seeing stronger bids this afternoon while this morning saw some lifts right out of the gate on the left side, sources say. 3m expiries are around 1 to 4 normals higher, while 1y expiries are roughly 1 to 2.8 normals higher on the day - both led by the right. 

In the ULC, 1y1y traded at 118bps on good size of $500m and then up as high as 120bps mid-morning, but is now seeing a 117/119bps market. One source suggested that the buying was “out of Europe” with less discrimination given on the particular level out of urgency to cover risk, he judged. Elsewhere, in CFS, 2x3 traded at 165.5bps and 166bps and sources note that area has been the focal point of speculation on Fed rate activity further out, with bets being taken on both sides.  

Meanwhile, in longer expiries, 5y5y has been better bid with trading at 863bps and then up this afternoon at 869bps and then last at 871bps, sources say. 

In skew, 1m10y 25bps each way risk reversal traded at +5bps and also the ATM versus 25bps high traded at 232bps and 45.5bps, respectively. One trader suggested that as the underlying rates have risen to the upper end that some are fading the richening in payers based on the outlook that “rates don’t have that much further to go.”

In other trading activity, 2y1y dealt at 159bps, 3m2y traded at 101bps, 3y1y dealt at 182bps, 1y10y dealt at 779bps, 20y5y dealt at 1083ps, a switch of 6m30y versus 2y30y traded at 1056bps and 1958.5bps,respectively, 6m10y dealt at 562bps, and 10y30y traded at 3250bps, 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.

Barclays – longer term uncertainty grows; supportive of bottom right   

Analysts at Barclays believe that “uncertainty on the longer-term level of rates could rise” as it finds that the neutral rate “is likely to be reassessed higher if growth remains strong, but, more importantly, perceived uncertainty around the neutral rate is likely to be higher.”

”Similarly, while the fiscal profile has deteriorated, it has also become more uncertain. We think that (the recent) upside surprises in borrowing needs sparked an increase in term premia, but it also underscored that predicting the fiscal trajectory has become harder."

 

“In part, this is because it is unclear which side of the fiscal equation is more sensitive to the high levels of inflation that have been experienced over the past couple of years, making the fiscal balance hard to predict. The downside risk of a recession only adds to the uncertainty on the longer-run fiscal profile, because a recession usually leads to a further deterioration.”

Examining the 6m standard deviation of surprises in the monthly budget balance relative to the Bloomberg consensus, Barclays finds that “through most of the decade before the pandemic, these surprises amounted to less than 0.5% of GDP.” While they “were especially high during the pandemic,” now nearly two years later, and three years since the start of the latest expansion, “they remain as high as they were during the Global Financial Crisis.”

Thus, “this suggests that longer run fiscal uncertainty is quite high, and this should help longer tenor/longer expiry vols” and indeed, Barclays finds that market participants “also appear to be more focused on uncertainty around longer tenors, as opposed to that on shorter tenors recently” as seen in recent SDR data.

With this backdrop, Barclays favors a long vega in the bottom right vs. short gamma through 10y20y + 3m10y vs 3m30y equal notional triangles. “Bottom right vols are structurally cheap in the context of rising long-term uncertainty and term premium moving higher, but short expiries may deliver a vol risk premium.”

New structured notes

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

• Merrill Lynch sold a $50m 10y NC4 fixed callable Formosa. The EMTN matures Sep 2033, is callable annually from Sep 2027 and pays a 5.8% coupon. Leads are KGI and Sinopac. Announced Aug 16.

   

• JP Morgan sold a $50m 20y NC7 zero coupon callable (non-Formosa). The EMTN matures Aug 2043, is callable annually from Aug 2030 and has an estimated IRR of 5.435%. Self-led and announced Aug 15.

   

• NIB sold a $50m 20y NC2 zero coupon callable (non-Formosa). The EMTN matures Aug 2043, is callable once in Aug 2025 and has an estimated IRR of 6.10%. Lead is Deutsche Bank and announced Aug 17.

   

• Standard Chartered sold a $20m 10y NC3 fixed callable. The EMTN matures Aug 2033, is callable annually from Aug 2026 and pays a 6.09% coupon. Self-led and announced Aug 17.

   

• Standard Chartered is working on a self-led fixed callable maturing Aug 2028 NC1 that pays 5.95%. EMTN.

   

• Goldman Sachs is working on a self-led fixed callable maturing Aug 2028 NC1 that pays 5.95%. Domestic MTN.

   

• Goldman Sachs is working on a self-led fixed callable maturing Feb 2026 NC1 that pays 5.8%. Domestic MTN.

   

• Goldman Sachs is working on a self-led fixed callable maturing Aug 2030 NC2 that pays 6.15%. Domestic MTN.

   

• JP Morgan is working on a self-led step-up callable maturing Aug 2031 NC2 that pays 5.75% to Aug 2027, 6% to Aug 2029, 6.5% to Aug 2030 and 7% thereafter. Domestic MTN.

   

• Barclays is working on a self-led fixed callable maturing Aug 2026 NC1 that pays 5.6%. EMTN.

   

• Barclays is working on a self-led fixed callable maturing Sep 2026 NC1 that pays 5.8%. Eurodollar.

   

• Citigroup is working on a self-led $8.48m inverse FRN maturing Aug 2025 NC1 that pays 6.5% -CMS2y. EMTN.  

   

• Citigroup is working on a self-led fixed callable maturing Feb 2026 NC6m that pays 5.8%. Domestic MTN.  

   

• UBS is working on a self-led fixed callable maturing Aug 2025 NC1 that pays 5.46%. EMTN.  

   

• UBS is working on a self-led fixed callable maturing Aug 2025 NC1 that pays 5.55%. EMTN.  

   

• UBS is working on a self-led fixed callable maturing Aug 2025 NC1 that pays 5.65%. EMTN.  

   

• Toronto Dominion is working on a self-led $50m fixed callable maturing Aug 2024 callable May 2024 that pays 6%. CD format. Domestic.

   

• Royal Bank of Canada is working on a self-led fixed callable maturing Aug 2043 NC5 that pays 6%. GMTN.