USD Vol: Skew trades; ULC sees underlying bid

Skew trades; ULC sees underlying bid

Swap rates are up to 6.7bps lower on the day, in a rejection of yesterday’s bear flattening and then some. The vol surface is seeing a modest bid of up to 1 normal in gamma points while 1m expiries are down around 6 normals, due to the day count issues (loss of long weekend encompassing Indigenous People’s Day), sources note.

This week has continued to see very lackluster flows and today was no exception. Still, one trader noted that amid “very poor liquidity” there continues to be an “underlying bid” in the ULC, and pieces like 1y1y and 2y1y remain bid.

2y1y traded at 154.5bps and 155bps today. Meanwhile, the erstwhile liquid 10y tails have not seen any trading though 1m10y was last 200/208bps, sources say.

Skew did see some trades today – the first this week – as 4y5y 100bps each way risk reversal dealt at +43bps, with two buyers versus one seller, a trader noted. Elsewhere, 1m30y ATM versus 25bps low receiver dealt at 185bps and 43bps, respectively, in which the bid was hit at the time.

In other activity, 3m5y dealt at 216bps, 1m30y traded at 375bps and 370bps, according to the SDR and sources.

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

Receiver ladder to take advantage of rich skew – BNP Paribas

Analysts at BNP Paribas recently highlight the still expensive receiver skew in the ULC, which the bank previously pointed out it its last two US monthly vol monitors (June, July). “This part of the vol surface is the only sector where low-strike receivers trade at a premium to high-strike payers” and  “even though the receivers trade at a premium, the daily behaviour of vols in the ULC with respect to daily rate movements has typically been the opposite of what skew would suggest,” BNP Paribas highlights.

“Specifically, fixed strike ULC swaption vols have generally underperformed to lower yields and outperformed to higher yields,” BNP Paribas underscores.

To taking advantage of expensive ULC receiver skew, BNP Paribas’ preferred expression to sell ULC receiver skew is a 6m2y A/A-25/A-50 receiver ladder (1x1x-0.5), noting that “the mis-weighted nature of the ladder allows for a wider terminal breakeven at 100bp below the current forward rather than at 75bp for a 1x-1x-1 ladder.”

“While the vol exposure is reduced, it is still short to benefit from the skew dynamics” and “the initial delta is flat instead of short as is customary with 1x-1x-1 receiver ladders” which “better protects the structure against a sharp move lower in yields with higher vols early in its life cycle,” BNP Paribas points out.

New structured notes

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

• Nordic Investment Bank sold a $10m fixed callable maturing Sep 2031 NC4 that pays 5%. Lead N/A. Announced Sep 7. EMTN.

   

• DZ Bank sold a $50m 20y NC7 Green zero coupon callable (non-Formosa). The EMTN matures Sep 2043 and is callable annually starting Sep 2030. Self-led. Estimated IRR 5.8%. Announced Sep 6.

   

• Goldman Sachs launched a self-led fixed callable maturing Sep 2026 NC1 that pays 6%. Domestic MTN.

   

• JP Morgan launched a self-led fixed callable maturing Sep 2032 NC2 that pays 6.05%. Domestic MTN.

   

• Merrill Lynch sold $20m 10y NC4 FRN callable Formosa. The EMTN matures Sep 2033 and is callable annually starting Sep 2027 and pays 1y ICE SOFR +145bps. Lead E Sun. Announced Sep 7.

   

• Nomura sold a self-led $10m fixed callable maturing Sep 2033 NC3 that pays 6.4%. EMTN.

   

• Royal Bank of Canada launched a self-led fixed callable maturing Oct 2024 NC8m that pays 5.65%. GMTN.

   

• Societe Generale launched a self-led fixed callable maturing Sep 2025 NC1 that pays 5.62%. EMTN.

   

• Standard Chartered launched a self-led fixed callable maturing Sep 2026 NC2 that pays 5.45%. EMTN.

   

• National Bank of Canada launched a self-led fixed callable maturing Sep 2033 NC6m that pays 6%. Domestic. Putable Mar 2024.   

   

• National Bank of Canada launched a self-led fixed callable maturing Sep 2033 NC6m that pays 6%. Domestic. Putable Mar 2024.   

   

• Royal Bank of Canada launched a self-led fixed callable maturing Sep 2026 NC1 that pays 6.0%. Domestic.

   

• Jefferies launched a self-led fixed callable maturing Sep 2026 NC1 that pays 6.625%. Domestic MTN.

   

• Ally Financial launched a fixed callable via InspereX maturing Sep 2028 NC6m that pays 7.2%. Domestic MTN.

   

• Ally Financial launched a fixed callable via InspereX maturing Sep 2033 NC6m that pays 7.45%. Domestic MTN.