Halister News

(Bloomberg) -- Extremely low levels in EUR rates are likely to make absolute yields on long-dated callable notes unattractive for investors despite the pickup obtained from selling embedded options, Barclays strategists including Amrut Nashikkar write in a client note.

• Long-dated callable note issuance should hence slow in coming months, though the rise in structured note issuance along with the drop in long-dated vols warrants near-term caution
  • As a result, turn neutral on vega in the bottom right part of the EUR vol surface
• Continue to find mid-expiry vols on the short-to- intermediate tails (up to 10y) to be underpricing uncertainty regarding these forward rates in the medium term
• Payer skew on mid-expiry vols can richen further as rates behave more lognormally with ECB unlikely to cut rates aggressively
• Retain recommendation to sell EUR 2y1y 1x2 payer spreads
• Portions of the top-left part of the USD vol surface remain rich from a fair-value perspective; maintain recommendation to buy USD 6m3y 1x2 payer spreads as a trade that also benefits from a gradual sell-off in front-end USD rates