1y1y flies higher ahead of FOMC, powered by rate move
Treasury yields are scraping at/through the upper end of the rate range today, with the 2y note yield just under 5.10% and the 10y note yield at 4.361% (5.8bps higher). The foray up and over the top end of the range has pushed the vol surface higher today as positions are adjusted ahead of the FOMC tomorrow, and with the bid gaining momentum this afternoon, led by the upper left.
“I think there is some short covering before the Fed,” remarked one trader, while the “rate levels certainly helps (the bid) in some areas.”
1y1y traded down as low as 101.5bps earlier today, but then traded at 103bps this afternoon and then traded up at 104bps and 105bps (or roughly +4.5 normals higher) in quick succession. 7y10y traded up at 1517bps (+0.7 normal) and now is last 1517/1527bps, sources say.
In other trading activity, 1y10y traded at 703bps (+1.2 normals), 2y3y dealt at 393bps, 5y10y traded at 1389bps, 3y1y versus 2y1y traded as a switch at 172bps and 146bps, respectively, 2y2y dealt at 276bps, 1m2y traded at 45.75bps, 5y5y dealt at 831bps, 1m10y traded at 189bps, 1m30y dealt at 345bps and 2y10y traded at 979bps, according to the SDR.
Vols wait for a breakout to go bid - Citigroup
Analysts at Citigroup note that while “implied rates vols have declined in recent weeks as expected… what has surprised some market participants is that it has occurred amid a continuous drift higher in yields.”
“While this divergence might seem unique at first glance, it is a near repeat to what happened earlier in the year,” the bank points out.
Looking at a scatter plot of 3m10y vol versus the forward rate, Citigroup roughly separates the observed market moves into different yield ranges, such as 2.90%-3.40% and 3.40%-4.00% and in doing this, it finds that “it appears that vol would trade very directionally with yields as the new yield peak was being confirmed.”
However, “after the yield range has been set, vol did not necessarily trade directionally with yield even as yields revisit the previously established peak” and “it is only when yields have exceeded the previous peak and is clearly in a new range does vol start to trade directionally with yields again,” Citigroup highlights.
Thus, the bank believes “vol can stay low for now unless the rates sell-off extends beyond the current yield peak.” Should that occur, then “the expectation for vol to quickly increase once that happens is rightfully reflected by the steep payer skews on 10y and 30y,” Citigroup points out.
That said, “we expect the potential vol bounce to be short-lived with implied vol quickly pulling back once the new yield range has been established,” Citigroup concludes.
New structured notes
For a complete review of USD MTN activity over the past week, please see USD MTNs.
- Royal Bank of Canada sold a self-led $20m fixed callable maturing Sep 2038 NC5 that pays 6.1%. Putable Sep2037. EMTN.
- Korean Ocean Business sold a $80m 5y FRN Formosa. The EMTN matures Oct 2028 and pays a coupon of O/N SOFR +97bps. Leads Sinopac, Shanghai Commercial, Standard Chartered. Announced Sep 19.
- National Bank of Australia sold a $350m 5y FRN Formosa. The Eurodollar matures Sep 2028 and pays a coupon of O/N SOFR +98bps. Lead SG Securities. Announced Sep 18.
- Bank of America sold a $150m self-led fixed callable maturing Sep 2025 NC1 that pays 5.55%. CD format. Domestic.
- Barclays launched a self-led fixed callable maturing Nov 2024 NC6m that pays 5.9%. GMTN.
- Citigroup launched a self-led inverse FRN maturing Sep 2025 NC1 that pays 5.35% to Sep 2024, then pays 6.5% -CMS2y. EMTN.
- Citigroup launched a self-led fixed callable maturing Mar 2025 NC3m that pays 4.95%. EMTN.
- Citigroup launched a self-led fixed callable maturing Mar 2025 NC3m that pays 5%. EMTN.
- CIBC launched a self-led fixed callable maturing Sep 2028 NC2 that pays 6.4%. EMTN.
- Toronto Dominion launched a self-led fixed callable maturing Sep 2025 NC6m that pays 5.9%. GMTN.
- Royal Bank of Canada launched a self-led fixed callable maturing Sep 2038 NC3 that pays 6.05%. GMTN.
- Standard Chartered sold a self-led $10m fixed callable maturing Sep 2028 NC1 that pays SOFR +1.15%. EMTN.
- Verizon Communications launched a fixed callable via Insperex maturing Sep 2053 NC1 that pays 5.9%. Domestic MTN.
- Verizon Communications launched a fixed callable via Insperex maturing Sep 2030 NC1 that pays 5.5%. Domestic MTN.
- Dow Chemical launched a fixed callable via Insperex maturing Sep 2053 NC6m that pays 6.1%. Domestic MTN.
- Dow Chemical launched a fixed callable via Insperex maturing Sep 2033 NC6m that pays 5.6%. Domestic MTN.
- Dow Chemical launched a fixed callable via Insperex maturing Sep 2028 NC6m that pays 5.3%. Domestic MTN.
- Ally Financial launched a fixed callable via Insperex maturing Sep 2028 NC6m that pays 7.3%. Domestic MTN.