Market Economics | Interest Rate Strategy - BNP PARIBAS ...

More documents

Recommendations

Info

US Gamma: Vol Plays Catch-Up with Turmoil • With markets in turmoil and the need for protection against lower rates magnified, vol has finally been bid up across the grid. However, it still lags in the gamma sector given the extent of the rate moves. • Of particular note is gamma vol on 10y tails, which is not only below longer expiries but is still low on an absolute basis given that the 10y rate has made new YTD lows. • STRATEGY: 3m10y should enjoy solid support until rates begin to stabilise, with receiver skew rising in the process. For those looking to be positioned for further stress in the financial markets, going long low strike vols is a good way to express this view. Chart 1: High Delivered Vol => High Gamma Vol… 300 225 150 75 3m10y ATM Vol 10y Realized Vol 0 Jan-08 Aug-08 Mar-09 Oct-09 May-10 220 200 Chart 2: …and an Inverted Vol Surface 3m10y ATM Vol 3m10y/2y10y Vol Ratio (RHS) 160% 150% 180 140% Financial markets are gripped by fear, driven by the contagion risk in the eurozone. Spreads are widening briskly across all products from OIS/BOR to mortgages (on a nominal basis vs 10y Tsy) to corporates, as equities also continue to slide around the globe. This has led to the pain trade playing out in rates, with the 10y Tsy and swap rates making new YTD lows and the rate curve flattening in the rally (although in Wednesday’s move, the Treasury curve bull-steepened more in line with typical flight to quality). With the increased realised volatility, implieds have found a new life too, as they should (Chart 1), but the gamma sector still lags longer expiries. Typically, when implied vols rise in response to big swings in the market, that tends to boost short expiries the most. This time too, the relative pickup in gamma vol did happen, but certainly not to the extent that one would expect (Chart 2). The argument that there is more room for gamma vol to rise becomes clearer when the absolute level of rates is considered: as rates close in on and break through a wellestablished range, either at the top or bottom end, vol is typically bid up. The 10y Treasury and swap rates have just dipped below 3.60%, making new lows for the year. Yet, as can be seen in Chart 3, implied vols still sit close to the bottom of their range, especially in relation to where they were trading in the period surrounding Lehman’s collapse. So is the vol market signalling a full-blown panic? Not exactly…not yet anyway. Skew provides another perspective on this last point: receiver vol has been trading below payer skew in 160 140 120 100 130% 120% 110% 100% 90% 80 80% Jan-08 Aug-08 Mar-09 Oct-09 May-10 Chart 3: New Low in Rates Should Boost Vol 225 200 175 150 125 100 3m10y ATM Vol 10y Swap Rate (RHS) 75 2.0 Jan-08 Aug-08 Mar-09 Oct-09 May-10 Chart 4: Receiver Skew is Up, but Nowhere near the Highs Seen in 2008 5.0 4.5 4.0 3.5 3.0 2.5 2.0 0.7 Jan-08 Aug-08 Mar-09 Oct-09 May-10 Source: BNP Paribas 10y Swap Rate 50bp 3m10y Rcvr/Payer Vol Ratio (RHS) 1.1 1.0 0.9 0.8 5.0 4.5 4.0 3.5 3.0 2.5 Bulent Baygun/ Rohit Garg 7 May 2010 Market Mover, Non-Objective Research Section 40 www.GlobalMarkets.bnpparibas.com
the gamma sector for some time now. This has indicated a lack of concern about the possibility of a near-term strong rally across the curve. If anything, there was more anxiety about a runaway sell-off, which intensified every time the 10y rate approached 4%. Judging by the receiver to payer vol ratio, the most recent rate move seems to have shaken the market’s complacency about the risk of lower rates, with low strike receivers gaining ground. However, the ratio is still below 100%. This is in contrast to the picture back in late 2008 (Chart 4) when the rate curve experienced massive bull flattening. In other words, receiver skew is not priced fully for a continuation of the pain trade that the market is worried about. Bulent Baygun/ Rohit Garg 7 May 2010 Market Mover, Non-Objective Research Section 41 www.GlobalMarkets.bnpparibas.com
Page 1 and 2: Market Economics | Interest Rate St
Page 3 and 4: UK: all eyes on the election US: re
Page 5 and 6: Event response The ECB is being ove
Page 7 and 8: Eurozone Periphery: Compare and Con
Page 9 and 10: over 20% in Q1) and, last but not l
Page 11 and 12: Market Stress Charts • Signs of s
Page 13 and 14: Chart 7: Greek Bank CDS* 900 Greece
Page 15 and 16: • The plan also contains a number
Page 17 and 18: Germany: Downs and Ups • The impa
Page 19 and 20: Retail sales data from month to mon
Page 21 and 22: On inflation, the statement was als
Page 23 and 24: quarterly average of 2.7% in the fi
Page 25 and 26: US Credit: Still the Recovery’s B
Page 27 and 28: Japan: Rising Chance of Sales Tax H
Page 29 and 30: BNP Paribas Surprise Indicator •
Page 31 and 32: UK headline After surprising to the
Page 33 and 34: US: Supply Could Affect Swap Spread
Page 35 and 36: steep curve is typically associated
Page 37 and 38: decline. We continue to maintain ou
Page 39: Chart 12: 90-119 Day Dlq for FRE 90
Page 43 and 44: EUR: Limited Nervousness at ECB Ten
Page 45 and 46: with the big redemption (EUR 17.7bn
Page 47 and 48: measures are not promptly taken to
Page 49 and 50: Table 1: BNP Paribas' Inflation For
Page 51 and 52: Table 3: BNP Paribas' Inflation For
Page 53 and 54: Table 1: BNP Paribas Carry Analysis
Page 55 and 56: What’s the call? It is relatively
Page 57 and 58: Update on FIN SEN and FIN SUB 5/10y
Page 59 and 60: Germany 10y: Within MT falling wedg
Page 61 and 62: Judging Currencies by Liquidity •
Page 63 and 64: type of regulation would reduce mon
Page 65 and 66: Euro Dives • The euro is collapsi
Page 67 and 68: Currency Spot Trade Recommendations
Page 69 and 70: Economic Calendar: 7 - 14 May (cont
Page 71 and 72: Key Data Preview Chart 1: US Payrol
Page 73 and 74: Key Data Preview Chart 5: UK Manufa
Page 75 and 76: Key Data Preview Chart 9: French GD
Page 77 and 78: Key Data Preview Chart 13: US Indus
Page 79 and 80: Treasury and SAS Issuance Calendar
Page 81 and 82: Central Bank Watch Interest Rate EU
Page 83 and 84: FX Forecasts* USD Bloc Q2 '10 Q3 '1
Page 85: RESEARCH DISCLAIMERS: IMPORTANT DIS

Market Economics | Interest Rate Strategy - BNP PARIBAS ...

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?