Implieds dip further; Cheap lotto options
Treasuries have sold off this afternoon, with yields last 3.5bp to 4bps higher on the day. The vol surface is down across the board, with the left side underperforming the most. 3m expiries are around unchanged to down 3 normals while 1y expiries are lower by roughly 0.8 normals to 3 normals.
“There have been some decent swings intraday, but there haven’t been any big moves. Yesterday, people expecting that CPI would result in a bigger move in rates were disappointed.”
1y1y traded down to a low of 104.5bps but is still pricing in around 8.5bp/day breakeven, a source noted while 1y10y is around a “more reasonable” breakeven of 6.7bp/day, a trader highlighted.
Meanwhile, the skew has continued to be receivers over in the ULC, with the market for 1y1y 100bp each way risk reversals a tight -9/-8bps. In other skew, some 3y20y ATM versus 100bps low receivers dealt at 887 and 320bps, respectively, and then dealt at 887bps and 325bps.
Also, a source pointed out that yesterday saw “lottery ticket” type trade of 1y 200bps low floors go through at 4bps, after a choice market at 4bps was lifted, and is a relatively “cheap option” should “something break” and the Fed needs to start easing aggressively.
In other activity, 6m10y traded in good size at 490bps, 3m10y traded at 343bps and then down at 341.5bps, 6m5y traded at 296bps, 1y10y traded at 711bps and then down at 709bps and also traded versus 1y20y at 709bps vs 1067bps, sources say. Further out, 10y10y dealt at 1609bps, then 1605bps and then up at 1607bps, according to the SDR and sources.
Sell 2y30y versus 10y10y vega neutral – JP Morgan
On a relative basis, analysts at JP Morgan find that the 2y30y versus 10y10y implied volatility spread “has recently richened considerably in relation to the broader vol surface.” To be sure, the bank finds that the residual from regressing this implied vol differential against the expiry curve (i.e. 1y1y minus 10y1y) and the tail curve (1y1y minus 1y10y) “has broken out of its recent range and at significantly positive levels.”
Furthermore, “appealingly, this vol differential has roughly equal (in magnitude) and offsetting (in sign) exposure to the expiry and tail curves respectively” and “since those summary descriptors of the vol surface themselves can be quite volatile but move roughly 1-for-1, the net result is that this implied vol differential is effectively insensitive to broader re-shapings of the implied vol surface, making additional hedges unnecessary,” JP Morgan highlights.
Therefore, JP Morgan favors selling 2y30y straddles versus vega-neutral amount of 10y10y straddles, and with that weighting, the trade is also short gamma, which dovetails with the bank’s current shorting of 30y tail gamma.
New structured notes
For a complete review of USD MTN activity over the past week, please see USD MTNs.
- JP Morgan sold a self-led $10m fixed callable maturing Sep 2033 NC1 that pays 6.05%. EMTN.
- Bank of America sold a self-led $10m fixed callable maturing Sep 2028 NC1 that pays 5.9%. Domestic MTN.
- UBS sold a $300m 2y NC1 zero coupon callable (non-Formosa). The EMTN matures Sep 2025 and is once Sep 2024. Self-led. Estimated IRR 5.94%. Announced Sep 13.
- UBS sold a $255m 2y NC1 zero coupon callable (non-Formosa). The EMTN matures Sep 2025 and is once Sep 2024. Self-led. Estimated IRR 5.94%. Announced Sep 13.
- Morgan Stanley launched a self-led fixed callable maturing Sep 2038 NC10 that pays 5.6%. Domestic MTN.
- Morgan Stanley launched a self-led fixed callable maturing Sep 2033 NC7.5 that pays 5.5%. Domestic MTN.
- Morgan Stanley launched a self-led fixed callable maturing Sep 2031 NC4 that pays 5.4%. Domestic MTN.
- Goldman Sachs launched a self-led fixed callable maturing Sep 2026 NC2 that pays 5.27%. EMTN.
- Barclays sold a self-led $10m fixed callable maturing Sep 2033 NC4 that pays 6.2%. EMTN.
- Citigroup launched a self-led fixed callable maturing Sep 2028 NC1 that pays 6%. Domestic MTN.
- Citigroup launched a self-led fixed callable maturing Sep 2025 NC6m that pays 5.75%. Domestic MTN.
- Nomura sold a self-led $10m fixed callable maturing Sep 2033 NC3 that pays 6.4%. EMTN.
- Deutsche sold a self-led $10m fixed callable maturing Sep 2025 NC1 that pays 5.3%. EMTN.
- Toronto Dominion sold a self-led $25m fixed callable maturing Sep 2028 NC1 that pays 6.35%. GMTN.
- Bank of Montreal launched a self-led fixed callable maturing Sep 2026 NC6m that pays 6%. Domestic MTN.
- Standard Chartered sold a self-led $16m fixed callable maturing Sep 2033 NC2 that pays 6.3%. EMTN.