USD Vol: CPI fails to stir; Implieds fall, led by gamma

CPI fails to stir; Implieds fall, led by gamma

Treasury yields are last 1.5 to 3.8bps lower on the day, in a bull steepening move. The vol surface is off the earlier lows after the slightly stronger than expected CPI did not move the markets much. Overall vols are still down on the day, with 3m expiries last around 2 to 3.7 normals lower on the day and 1y expiries roughly 1.5 to 2.5 normals softer.

With typically event worthy CPI not causing much of a stir, the continued lower delivereds have weighed on longs, sources say. In addition, the non-trending nature of rates in general has hurt vol as price action has been tight and rangebound, causing overall customer activity to be low.  

In interbank activity, 1y1y traded at 106.5bps and 107.5bps and 108bps, 6m2y versus 6m1y traded as a switch at 136bps and 62bps, respectively, 3m2y dealt at 89bps, 1m1y traded at 16.75bps, and 14.75bps, 1y5y traded at 442bps, 441bps and 440bps, 1m5y dealt at 115bps,  1m10y dealt at 193bps and 190bps, 3m10y traded at 344bps, 3y2y traded at 333bps and 7y1y dealt at 210bps, according to the SDR.

In longer expiries, 3y20y traded at 1776bps versus 20y10y  at 1847bps.

In skew, some 1m30y 25bp each way risk reversals traded at +8bps and +9bps, and a 3m10y 100 wide strangle versus straddle dealt at 89.5bps and 347bps, sources say.

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

CMS curve vol still too rich – Citigroup  

Analysts at Citigroup find that CMS curve vol still looks “exceptionally rich relative to swaption vol, as reflected by the implied CMS correlation that is still trading well below the realized correlation”:

“Even though the implied correlation should trade slightly below realized to reflect a premium that is built into the CMS curve options, the spread between the implied and realized has been wider this year than it has been in the past. We believe the persistent richness of CMS curve vol is primarily due to the strong buying demand for 1y and 2y CMS curve caps throughout the year from investors (including non rates players) who are looking for hedge for an eventual curve re-steepening at nearly all cost. “

 

“The bear steepening in July/August from near historical inversion has likely fueled the demand for curve caps even more. Even though we are in the steepening camp (expressed through forward starting steepeners) we believe that trying to position for the eventual curve resteepening by being long CMS curve caps outright is especially cost inefficient given the richness of implied curve vol.”

 

“In hindsight, we know that long positions in CMS curve caps have generally lost money over the past two years after accounting for the forwards and the cost of the options. For example, 6m ATMF cap on 2s30s would have been profitable only if the investors were able to perfectly time the small windows around the regional banking crisis in March and the recent bear steepening.”

Going forward, Citigroup see headwinds for curve vol “as we approach the end of the hiking cycle,” noting that “back in the early 70s/late 80s, realized vol on the curve had a tendency to decline in the immediate months following the last hikes  and the same pattern can repeat this time.”

Thus, rather than buying curve caps to express a steepening view, Citigroup reiterates “selling OTM curve caps as an overlay to a steepener in swaps to effectively create a covered call on the curve” and it notes that “the premium collected from selling the OTM curve caps would help offset the steepener’s negative forward-spot roll.”

New structured notes

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

• SocGen sold a $30m 15y NC7 zero coupon callable (non-Formosa). The EMTN matures Sep 2038 and is callable annually starting Sep 2030. Self-led. Estimated IRR 6.13%. Announced Sep 13.

   

• Asian Development Bank sold a $30m 20y NC6 zero coupon callable (non-Formosa). The EMTN matures Sep 2043 and is callable annually starting Sep 2029. Lead MS. Estimated IRR 5.63%. Announced Sep 13.

   

• HSBC sold a $50m 20y NC7 zero coupon callable (non-Formosa). The EMTN matures Sep 2043 and is callable once on Sep 2030. Self-led. Estimated IRR 5.75%. Announced Sep 11.

   

• ING Bank sold a $10m fixed callable maturing Sep 2033 NC4 that pays 6.08%. Lead N/A.  EMTN.

   

• IBRD sold a $10m fixed callable via NatWest maturing Sep 2031 NC4 that pays 5.03%. Eurodollar. Announced Sep 12.

   

• JP Morgan launched a self-led floating callable maturing Jul 2028 callable Jul 2024 that pays O/N SOFR +725bps . Credit linked to Petroleos Mexicanos. EMTN.

   

• JP Morgan launched a self-led fixed callable maturing Sep 2025 NC1 that pays 5.95%. Domestic MTN.   

   

• BNP Paribas launched a self-led fixed to FRN callable maturing Jul 2028 NC2 that pays 7% to Oct 2025 and then pays a coupon tied to SOFR. Credit linked to Abu Dhabi. EMTN.

   

• Royal Bank of Canada launched a self-led fixed callable maturing Sep 2026 NC2 that pays 5.73%. GMTN.  

   

• UBS launched a self-led fixed callable maturing Sep 2025 NC1 that pays 5.47%. EMTN.  

   

• Bank of Montreal launched a self-led fixed callable maturing Sep 2026 NC2 that pays 5.65%. Domestic MTN.

   

• Standard Chartered sold a self-led $30m fixed callable maturing Dec 2028 NC2 that pays 6.8%. Credit linked. EMTN.

   

• SocGen launched a 10y NC3 fixed callable. The EMTN matures Sep 2033, is callable annually starting Sep 2026 and pays 6.05%. Self-led.