USD Vol: Left side outperforms; Sparse trading

Left side outperforms; Sparse trading

Treasuries are bouncing around the highs of the day, with the bull steepening post weaker data amounting to a strong realized move of up to 13bps lower in the front end of the swaps curve. The 7y auction helped to boost the belly as well, as the auction came 2.3bps through the 1pm bid side, with higher indirects (75.3%), resulting in a lower dealer allocation (9.8%) and a strong bid-to-cover 2.66x.

The vol surface is mostly higher, led by the upper left side. 3m expiries are around -0.3 normal lower on the right side versus around 2.5 to 3 normals higher on the left.  Like yesterday, not much has traded in the upper left corner and just a handful of trades have dictated the direction. "I think the market is just catching its breath after some heavy left side selling programs in the last two and half weeks," remarked one source. The move could also be in part due to the high delivereds, and the source noted that delivereds today "are pretty decent, though more in the belly than front end."

Moreover, with the sparsely liquid markets, you don’t need much to go through to move areas of the surface, another source highlighted. For example, in ULC trading today thus far,  2y2y traded at 288.5bps while 1y3y traded at 308bps and some 6m1y traded at 66.25bps.

Elsewhere switches involving 20y tails saw some activity today. For instance, 2y20y versus 3y20y traded at 1523bps and 1803bps, respectively, and in another switch, 3y20y versus 1y20y dealt at 1802bps and 1102bps, respectively. A small switch of 4y20y versus 1y25y may have dealt at 1990bps and 1233bps.

In the short expiries, 1m10y traded at 212bps and 1m30y dealt at 389bps, according to the SDR.

For USD option trades on the SDR see here and for volumes please see here.  

Stay short gamma – JP Morgan

Analysts at JP Morgan find that the declines in implied volatility last week “not surprising” as the bank recently highlighted that “the markets are converging to pricing a Fed that's on hold and the resulting decline in the magnitude of the ‘level’ factor” (or PCA1) was “bearish for volatility.”

Moreover, JP Morgan finds that the bearish view “was only reaffirmed by Fed Chair Powell's comments on Friday” at Jackson Hole:

”His comments are largely consistent with a Fed that is (i) inclined to be patient and balance the strength of inflation pressures against the lagged effects of the hikes already in the system as well as the emergent credit tightening, while (ii) leaning against premature complacency on the inflation front and resulting expectations of policy rate cuts. Such a policy stance is indeed consistent with moderating both right and left tails, and should help lessen jump risk. Thus, fundamentals continue to support a bearish view on volatility going forward.”

Further, JP Morgan finds that “seasonals are poised to turn supportive of short gamma positions as well” as it points out that historically “selling straddles has been profitable in early September, likely on the back of improving market liquidity.” Therefore, JP Morgan favors sticking with its bearish gamma view.

New structured notes

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

• Credit Agricole sold a $3.7m 5y NC2 zero coupon callable (non-Formosa). The EMTN matures Sep 2028 and is callable annually starting Aug 2025. Self-led. Estimated IRR 6.4%. Announced Aug 25.

   

• Bank of America is working on a self-led $50m fixed callable maturing Sep 2025 callable Dec 2024 that pays 5.45%. CD format. Domestic.

   

• UBS is working on a self-led fixed callable maturing Sep 2025 NC1 that pays 5.39%. EMTN.

   

• UBS is working on a self-led fixed callable maturing Sep 2025 NC1 that pays 5.8%. EMTN.

   

• UBS is working on a self-led fixed callable maturing Sep 2025 NC1 that pays 5.39%. EMTN.

   

• Toronto Dominion is working on a self-led fixed callable maturing Oct 2024 callable Jun 2024 that pays 5.75%. GMTN.

   

• Toronto Dominion is working on a self-led step-up callable maturing Sep 2028 NC1 that pays 5.85% to Sep 2025, 6.15% to Sep 2027 and 7% thereafter. GMTN.

   

• Toronto Dominion is working on a self-led fixed callable maturing Sep 2028 NC1 that pays 6.35%. GMTN.

   

• Toronto Dominion is working on a self-led fixed callable maturing Sep 2028 NC1 that pays 6%. GMTN.

   

• Toronto Dominion is working on a self-led fixed callable maturing Sep 2025 NC6m that pays 5.85%. GMTN.

   

• Royal Bank of Canada is working on a self-led fixed callable maturing May 2024 NC6m that pays 5.5%. GMTN.

   

• Royal Bank of Canada is working on a self-led fixed callable maturing Sep 2024 NC9m that pays 5.6%. GMTN.

   

• Societe Generale is working on a self-led fixed callable maturing Sep 2025 NC1 that pays 5.74%. EMTN.

   

• Ford Motor Credit is working on a fixed callable via InspereX maturing Sep 2027 NC1 that pays 7%. Domestic MTN.  

   

• Dow Chemical is working on a fixed callable via InspereX maturing Sep 2033 NC6m that pays 5.5%. Domestic MTN.  

   

• Dow Chemical is working on a fixed callable via InspereX maturing Sep 2053 NC6m that pays 5.95%. Domestic MTN.  

   

• Dow Chemical is working on a fixed callable via InspereX maturing Sep 2028 NC6m that pays 5.2%. Domestic MTN.