Halister News

--NAMITHA JAGADEESH

(Bloomberg) -- Fading U.K. political uncertainty may weigh on long-tail GBP swaption volatilities, flattening the vol grid with Brexit risks and BOE rate-cut expectations supporting the short-tail, Bloomberg strategist Tanvir Sandhu writes; see chart here.

• GBP top-right outperforms grid with 3m1y implied vol +0.35bp/day at 2.05bp/day (see swaption spreadsheet here)
• Near-term low delivered vol may weigh on long-tail gamma positions
• Sonia MPC-dated forwards currently pricing 79% probability of a 25bp cut this week, assuming 4bps Sonia-base rate corridor
  • Carney already said some easing will be needed over summer with balance of risks identified to the downside
• While long-tail 25bp skew has unwound from post-Brexit levels with 3m10y skew now near 1-year mean, short-tail 25bp skew remains near post-Brexit lows; see chart here of 3m2y 25bp skew
  • Indicates receiver vols on short-tenor swaps remain bid compared to payer vols
• GBP 3m10y swaption vol currently near bottom of range seen since March at 5bp/day, with Theresa May set to take office as new PM tomorrow; see here
• NOTE: See BOE preview here

• NOTE: Tanvir Sandhu is an interest-rate and derivatives strategist who writes for First Word. The observations he makes are his own and are not intended as investment advice.