USD Vol: That sinking feeling continues across the surface

That sinking feeling continues across the surface

Realized volatility has skated in the lower single digits for the session, with the rates curve bear flattening. Long end rates are drifting lower by 3bps while the front end sees rates up to 2.5bps higher. The vol surface is lower, with 3m expiries down around 0.5 to 2 normals, led by the left side. Further out, 1y expiries are 0.5 to 2.5 normals lower, also led by the left side.

1y1y has traded down to 102bps today but is still tracking around 8.2bp/day breakeven to which one source felt was “still high,” especially relative to the low delivered volatility seen this month.  “The 2y rate is really no moving and you aren’t seeing those big moves you used to see in the front end with events like CPI,” the source noted. Still 1y1y has cheapened up around 15 annualized from the 7th of September from around 145 annualized to the current level around 130.5 annualized, with it dropping down around 1.5 to 2.75 normals every day for the past week or so. 

In interbank activity today, 1y1y traded versus 3m2y at 102bps and 84.5bps, respectively, 1y1y versus 1y10y dealt as a switch at 102bps and 700bps, respectively, and 6m2y dealt at 127bps, according to the SDR.

In longer tails, 1y10y traded outright at 699bps,7y20y traded at 2325bps, 1m30y dealt at 334bps, 1y25y traded at 1185bps and 1180bps and 1m10y dealt at 189.5bpd and 6m30y at 910bps, according to the SDR.

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

Sell 3m10y strangles – BNP Paribas

Analysts at BNP Paribas favor selling 3m10y strangles as its outlook is for range trading in the 10y. Indeed, the bank finds that “10y UST yields have begun to settle into a range” as the fall in yields post the August NFP “was short-lived and limited, while the sell-off failed to extend to new highs after a stronger-than-expected August CPI report – even as Treasury auctioned $35bn 10s and $20bn 30s this week.”

Moreover, BNP Paribas believes the reaction function to US economic data “appears to be sending a signal that a 4.25% 10y UST yield may be the near-term center of gravity” which is very close to the bank’s end  of 2023 forecast of 4.20% and this outlook is consistent with its view that “the August rise in term premium was justified, but the need for further adjustment higher is limited.”

Looking ahead, BNP Paribas expects intermediate and longer-end yields “to be sticky even if the US economy begins to show signs of slowing.”

With this backdrop, the bank favors selling 3m10y +/-25bp strangles even as “falling realized vol has pushed 3m10y implied vol near 2023 lows.”

“While the 3m10y implied-to-realized ratio has fallen and is approaching 100%, implied vol may come off further to trade at a discount to realized vol, as it did in late 2022/early 2023 and earlier this summer,” BNP Paribas argues.

In addition, BNP Paribas suggests “even if the 10y yield still moves a reasonable amount on a day-to-day basis, one should still be comfortable selling gamma if convinced that the prevailing rate range will hold.”

Specifically, the bank looks to sell 3m10y +/-25bp strangle with a target of 5bp and a stop of 28.75bp. In a scenario analysis of the trade, not delta hedged, BNP Paribas highlights:

“On an instantaneous basis, a rate shock of more than 30bp would likely push the trade to our stop-loss (-7bp), even if 3m10y vol falls 10bp. To take into account how the trade should evolve over time, we age it one month with the same rate and vol shifts. With the benefit of +8bp in carry, the trade is more durable. A rate shock of 40bp with rising implied vol may be needed to reach our stop-loss.”

New structured notes

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

• Citigroup sold a self-led $4m fixed callable maturing Sep 2033 NC2 that pays 6.0%.  Domestic MTN.

   

• Bank of America sold a self-led $15m fixed callable maturing Sep 2033 NC2 that pays 6%.  Domestic MTN.

   

• Bank of Montreal launched a self-led USD extendible with initial maturity Sep 2024 and then extendible to Sep 2027 that pays 6.35%. Domestic MTN.

   

• Royal Bank of Canada launched a self-led USD extendible with initial maturity Sep 2024 and then extendible to Sep 2033 that pays 6.5%. Domestic MTN.

   

• Bank of Nova Scotia sold a $30m 20y NC8 zero coupon callable (non-Formosa). The EMTN matures Sep 2043 and is callable annually starting Sep 2031. Self-led. Estimated IRR 6.26%. Announced Sep 14.

   

• Goldman Sachs launched a self-led fixed callable maturing Sep 2028 NC2 that pays 6.1%. Domestic MTN.   

   

• Goldman Sachs launched a self-led fixed callable maturing Sep 2026 NC1 that pays 6.1%. Domestic MTN.   

   

• Goldman Sachs launched a self-led fixed callable maturing Sep 2028 NC1 that pays 6.25%. Domestic MTN.   

   

• Goldman Sachs launched a self-led step-up callable maturing Sep 2030 NC1 that pays 6% to Sep 2025, 6.25% to Sep 2027, 6.5% to Sep 2028, 7% to Sep 2029 and 8% thereafter. Domestic MTN.

   

• Goldman Sachs launched a self-led fixed callable maturing Sep 2033 NC2 that pays 6.15%. Domestic MTN.   

   

• Bank of America launched a self-led fixed callable maturing Sep 2028 NC1 that pays 6%. Domestic MTN.  

   

• Barclays launched a self-led fixed callable maturing Sep 2025 NC1 that pays 5.1%. EMTN.  

   

• Deutsche launched a self-led fixed callable maturing Sep 2025 NC1 that pays 6.09%. EMTN.

   

• Toronto Dominion launched a self-led step-up callable maturing Sep 2028 NC1 that pays 5.75% to Sep 2025, 6% to Sep 2027 and 7% thereafter. GMTN.

   

• Toronto Dominion launched a self-led fixed callable maturing Sep 2028 NC1 that pays 6.25%. GMTN.

   

• Toronto Dominion launched a self-led fixed callable maturing Sep 2028 NC1 that pays 6%. GMTN.

   

• Toronto Dominion launched a self-led fixed callable maturing Sep 2025 NC6m that pays 5.75%. GMTN.

   

• Standard Chartered launched a self-led fixed callable maturing Oct 2026 NC2 that pays 5.47%. EMTN.

   

• Standard Chartered launched a self-led fixed callable maturing Sep 2028 NC1 that pays O/N SOFR+ 1.1%. EMTN.