Surface steepens; Illiquid; CPI wait
Treasuries bear steepened early on, with yields anywhere from 0.5 to 4.25bps higher on the day. The vol surface has steepened out with the underlying move, with gamma underperforming versus longer expiries. For example, 3m expiries are around 1 to 2 normals lower, led by the left side while 1y expiries are unchanged to down around a normal, also led by the left. Meanwhile, vega points are slightly firmer by around 0.5 normal amid a derth of trades.
Indeed, with the rangebound price action, the amount of interbank trading activity since Labor Day continues to be relatively anemic, sources highlight. Looking at the ULC, one source regarded the daily breakeven as “still fairly high,” with, for example, “1y1y around 9bps/day and 2y1y not far behind at 8.8bp/day.” The trader considered that there was still uncertainty as far as the economic outlook, and causing the front end to be “jittery” at times while the overall liquidity remains fairly poor.
Further, going into Wednesday’s CPI, a source did not think there would be much selling of vol in front of the event.
In interbank activity, 1y10y traded at 742bps and then down at 738bps, 1y20y dealt at 1116bps and then down at 1111bps, 1m30y traded at 362bps and then at 358bps, 1y5y traded at 458bps, 1m7y dealt at 154.5bps, and 1y2y traded at 218bps. In vega, 7y10y traded at 1532bps and 4y10y at 1306bps, and 7y20y dealt earlier at 2350bps, according to the SDR.
Short 3y10y – Citigroup
For the majority of 2023, analysts at Citigroup have maintained a structural bearish vol bias “in anticipation of the end of the Fed hiking cycle and a potentially longer than expected rate pause.”
Indeed the bank highlights that “experience from the late 70s/early 80s suggests that rates vols have a strong tendency to decline in the months immediately after the last rate hike.”
Currently Citigroup finds implied swaption vols “trading only at a slight premium to their respective realized vols,” and the bank recommends positioning for the likely cheapening via shorting 3y10y swaption vol.
New structured notes
For a complete review of USD MTN activity over the past week, please see USD MTNs.
- NAB sold a $50m 20y NC7 zero coupon callable (non-Formosa). The GMTN matures Sep 2043, is callable once in Sep 2030 and has an estimated IRR of 5.79%. Self-led and announced Sep 11.
- SocGen sold a $100m 15y NC2 zero coupon callable (non-Formosa). The EMTN matures Sep 2038, is callable every 3m from Sep 2025 and has an estimated IRR of 5.30%. Lead unconfirmed and announced Sep 08.
- JP Morgan sold a $190m 5y floating rate Formosa. The EMTN matures Sep 2028 and pays SOFR +100bps floored at 0%. Leads are Cathay, E.Sun, JPM, Mega International, President, Sinopac and Yuanta. Announced Sep 7.
- Kommunalbanken sold a $50m 20y NC6 fixed callable. The EMTN matures Sep 2043, is callable twice in Sep 2029 and Sep 2037, and pays a 5.36% coupon. Lead is DZ and announced Sep 7.
- JP Morgan launched a self-led CMS steepener maturing Sep 2028 NC1 that pays 10% for the first year, then pays 10*(CMS2y/10y), floored at zero. Eurodollar.
- IBRD sold a $100m 5y NC1 fixed callable. The EMTN matures Sep 2028 and is callable annually starting Sep 2024 and pays a coupon of 5.41%. Lead Nomura. Announced Sep 11.
- NIB sold a $100m 3y NC2 fixed callable. The EMTN matures Sep 2026 and is callable Sep 2025 and pays a coupon of 5.06%. Lead CACIB. Announced Sep 8.
- JP Morgan launched a self-led fixed callable maturing Sep 2033 NC2 that pays 6.15%. Domestic MTN.
- JP Morgan launched a self-led fixed callable maturing Sep 2025 NC1 that pays 5.45%. EMTN.
- JP Morgan launched a self-led fixed callable maturing Sep 2025 NC1 that pays 5.65%. Domestic MTN.
- JP Morgan launched a self-led fixed callable maturing Sep 2028 NC1 that pays 6.1%. Domestic MTN.
- JP Morgan launched a self-led fixed callable maturing Sep 2028 NC1 that pays 5.9%. Domestic MTN.
- Bank of America launched a self-led step-up callable maturing Sep 2030 NC1 that pays 6% to Sep 2028 and 6.5% thereafter. Domestic MTN.
- Barclays launched a self-led fixed callable maturing Jun 2028 NC3 that pays 7.12%. Domestic MTN. Credit linked to ArcelorMittal.
- Royal Bank of Canada launched a self-led fixed callable maturing Sep 2024 NC6m that pays 5.4%. EMTN.