Gamma has steadied after coming off sharply following the ECB meeting. In the underlying, the Bund moved lower in the afternoon session with the 10y future last down 50 ticks.
In the top left, 1y1y has edged back above 100nvol after losing 10 normals last week and was last marked at 100.3 (+0.9). Further out, 1y10y moved up to 95.1 (+0.9) after hitting a low near 92nvol following the ECB meeting.
In vega, the direction was similar with most pieces seeing a similar rebound. For example, 5y10y was last up 1nvol at 88.6 having dipped below 87nvol towards the close of Friday's session.
ECB limits left side - Barclays
In its latest rates weekly Barclays argues the ECB has put a limit on the left-hand of the grid. It writes:
- "The front-end market pricing is less than a 20% chance of another hike, and with upside headline inflation risk, we see the distribution of ECB policy paths as very limited and expect short-expiry LHS vol to decline... the range of upside outcomes for growth in the short and medium term have compressed, further supporting a decline in short-end vol.
- "We think that the term structure in vol highlights an opportunity in 6m1y at c.80 bp/y. Implied volatility has moved lower, but there is still an implied vs. realized ratio of c.1.15 in 6m1y. From a terminal persecptive, 6m1y straddles offer a +/- 45bp breakeven on expiry, which is quite wide in the context of the ECB on hold. To reach the lower breakeven, cuts have to be delivered within the next six months, which is unlikely, in our view.
- "In a bearish scenario, the ECB can deliver one or more hikes if headline inflation increases, but several cuts in 2024 will need to be priced out for 1y rates to reach the upper breakeven. Moreover, the rolldown is attractive in front-end term structures, where EUR 6m1y offers about 19 bp/y of roll-down in 3m time, compared with 3 bp/y in 6m10y. We recommend selling 6m1y ATM straddle against 6m10y ATM straddle, vega-neutral, to capture the richness in the top left.
- "While front-end volatility will be likely constrained by the ECB, longer tenors in EUR may still move. 6mf10y rates in EUR have been increasingly correlated with external factors, such as the global term premium rise and US neutral rate repricing, while the front end has started to disentangle from the global duration market and will continue to do so if the ECB maintains its stance. The end-of-cycle dynamic also works in the trade’s favour... when recession risk increased soon after the last hike, the end-of-cycle shifted volatility from the LHS to RHS, compared with what was priced into the term structure."
New structured issues
For a summary of recent structured issuance, see EUR MTNs.