HALISTER1: GBP Swaptions Stir From Slumber as Brexit Risks Mount: Analysis

GBP Swaptions Stir From Slumber as Brexit Risks Mount: Analysis

(Bloomberg) -- Sterling long-expiry rate volatility is waking up to Brexit risks as polls skew toward a “leave” vote, although it still remains below past year’s highs, Bloomberg strategist Tanvir Sandhu writes.
  • U.K. 1y10y and 1y2y swaptions have been late to react to one of the year’s biggest political risks, which has driven near-term pound volatility to record highs, amid ongoing global yield compression; see swaption vols spreadsheet here
    • Short-expiry vols have risen much more though, with 3m10y climbing to 11-month high of 91bp/annual
  • Term structure of 10y tenor GBP swaption volatility has now turned negative for 2m expiry vs 1y while it is at zero for 3m vs 1y (see chart here), sluggishly attempting to narrow the gap with deeply inverted FX counterparts
  • GBP 1y10y implied vol vs USD has now hit the highest level since at least 2011
  • However, the absolute GBP rate vol still remains below YTD high of 92bp/annual
    • Further increase in Brexit pricing can cause GBP 1y10y ATMF straddles to break out to the upside
  • Among U.K. rate markets, swaptions may see the biggest impact of a Brexit with the implications for GBP rates much less certain amid opposing forces acting on the yield curve
  • NOTE: See earlier analysis here: GBP Rate Options Underpricing Brexit Compared With FX
  • NOTE: From May 11, if swaption trends seen before 2014’s Scottish independence referendum are any guide, rates markets could follow FX options to turn the volatility spread negative as early as in a month
  • 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.
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

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HALISTER1: UST MORNING CALL: Post-FOMC Outlook; Pay Dec. Fed-Dated OIS: RBS

UST MORNING CALL: Post-FOMC Outlook; Pay Dec. Fed-Dated OIS: RBS

(Bloomberg) -- Treasuries extend gains overnight following yday’s Fed meeting; 2Y underperforms, paring post-FOMC advance.
  • Following FOMC, continue to favor 5Y, outright and on the yield curve via 2s5s30s butterfly; prefer butterfly over 5s30s steepener, given risks around the upcoming EU referendum, Morgan Stanley says in client note
  • JPMorgan was the outlier among banks this week in terms of analyst calls, with most others bullish on USD rates duration
    • Stop out of tactical short duration position initiated last week, turn neutral on Treasuries, JPMorgan says in client note
    • 10Y yields could decline 10-12bps on a Brexit outcome, “remain” would push yields just 5-7bps higher: JPM
  • RBS says in client note that the market is extended in technical momentum; however, the U.K. referendum prevents any thoughts of going short; instead, like paying 50% Dec. meeting date OIS, look to get to 100% post-referendum
  • Fed needs CPI to stay strong; any weakening today would help rates go lower, faster, encouraging further flattening; 30Y yields testing significant resistance at 2.38%, lows seen in Feb., BMO says in client note
  • Technicals:
    • Resistance: 132-17+ (Feb. 11 high); 132-24 (pivot r2)
    • Support: 132-00+ (June 15 mid price); 131-18 (June 15 low)
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

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HALISTER1: U.S. ECO PREVIEW: CPI, Jobless Claims, Philly Fed Due in 5 Min.

U.S. ECO PREVIEW: CPI, Jobless Claims, Philly Fed Due in 5 Min.

(Bloomberg) -- Consumer price index seen rising 0.3% m/m in May after increasing 0.4% in April (forecast range +0.2% to +0.6%); core CPI seen rising 0.2% last month after increasing 0.2% prior month (forecast range +0.1% to +0.3%)
  • Bloomberg Intelligence: “Significant increase in gas prices should provide a lift to headline inflation”
  • Initial jobless claims seen at 270k in wk ended June 11 vs 264k prior wk (forecast range 257k to 280k)
  • Philadelphia Fed Business Outlook seen at 1 in June vs -1.8 in May (forecast range -4 to 5)
  • Current account balance seen at -$125b in 1Q vs -$125.3 in 4Q (forecast range -$113.9b to -$135b); tracks trade in goods, services, income and current transfers
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

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UUID: 7947283