Short-dated expiries bounce higher
Near-dated expiries firmed up today as yields increased following overnight BOJ hawkish remarks. The 10y Bund yield increased around 3bps to 2.67%.
The 1m expiries firmed up by up to 3 normals, with 1m10y last marked up 3nvol at 93.1 and bouncing off recent lows having dipped below 90nvol on Friday for the first time since early summer. The gains extended out to 3m expiries, with most pieces from 3m2y out to 3m30y gaining about 0.2 to 0.3nvol.
Further out, the rest of the grid dipped lower with the bottom right slipping around 0.3nvol. For instance, 5y10y declined by 0.3 to 88.9, taking it towards the bottom of the recent range.
Shift in tail risk - SocGen
In its latest rates weekly Societe Generale examines a shift in tail risk during 2023. It writes:
- "In 2023, there has been significant movement in tail risk pricing within the EUR swaption smile. The receiver skew increased substantially in March, while the payer skew collapsed in both short and long tenors. The swaption smile indicates the market pricing of tail risks. It also reflects the market-implied correlation between rates and volatility. For instance, the 6m10y smile transitioned from a skew towards high strikes to a symmetric shape, meaning that payer skew declined while receiver skew rose. In the same way, but more pronounced, the shorter tenors, such as 6m2y, shifted from an upward sloping to a downward sloping skew, meaning low strike receivers are valued at more expensive vol levels.
- "These alterations in the volatility smiles imply that only a sharp repricing in favour of more ECB rate cuts or a significant risk-off event causing rates to decline, particularly in longer maturities, would trigger increased volatility. Conversely, episodes of rising rates no longer have the same effect of driving up volatility. However, because of the UST-led bond sell-off in August driving long-maturity rates to new highs, EUR swaptions have again shifted in favour of high strikes. This is particularly true for long tails, where the payer skew is again more expensive than the receiver skew. In short rates, low strikes remain richer than high strikes, though much less so than in spring."
New structured issues
For a summary of recent structured issuance, see EUR MTNs.