Halister News

(Bloomberg) -- Pressure likely to remain on USD rates vega as high callable issuance seen persisting, with investors replacing bonds that are called and increasing their overall allocation to these products, Morgan Stanley strategist Mikhail Levin writes in client note.

• With vol in this sector near the lows, and particularly so when looking at long-dated forward vols, there is limited room for it to fall further in the near term
• However, if this pressure from issuance is combined with a sharp selloff in long-end rates, long expiry vols could conceivably fall sharply
• Demand from Taiwanese insurers shows no sign of abating with foreign bond holdings increasing substantially month-over- month on a consistent basis
• Moreover, with global yields unlikely to rise to a point where these insurers can easily meet their yield targets, their asset choice is quite limited
• The two factors would be conspiring against tactical longs in vega and forward vol, exacerbated by the lack of natural buyers in the market willing to take the other side of the large flow
• USD long-expiry vols remain primarily driven by callable bond issuance and dealer hedging dynamics