20181114-法国巴黎银行-Themes_and_trades_in_US_rate_vol_8页_1mb

US Rate Volatility Summary

Core Themes and Trades

This document analyzes three key themes in US rate volatility:

1. Level vs Fair Value: The current volatility is close to fair value, based on rolling regression analysis against rates and the curve shape.
2. Vega vs Gamma: Vega is unlikely to be pressured against gamma due to the ongoing lack of Formosa bond supply, which limits volatility pressure.
3. Hedge Against Yield Curve Steepening: CMS curve caps continue to offer protection against a weakening economy and yield curve steepening.

Evaluation Methods

• The evaluation is based on three core trades:
  • 6m5y payer ladder: Used to capitalize on volatility spikes and rate declines.
  • 5y30y vs 1y30y calendar spread: A trade that benefits from the flattening of the yield curve.
  • 2y2s10s CMS curve cap: A hedge that profits from yield curve steepening and is long volatility.

Key Positions and Targets

1. 6m5y Payer Ladder

• Close: 14bp, resulting in a +14bp P&L.
• Reason: The trade was initiated in May due to Italian political uncertainty, and it has been unwound as it is now 1bp below the target of 15bp.
• Outcome: The trade has been exited due to the passage of time and the change in market dynamics.

2. 5y30y vs 1y30y Vol Calendar Spread

• Entry: 56bp
• Current: 60bp
• Target: 85bp
• Stop: 43bp
• Carry: +2bp/month
• Reason: The trade is held due to the lack of Formosa bond supply and the absence of the seasonal dynamic that would typically cause long-dated volatility to cheapen. It is expected that 5y30y could richen another 5–10% relative to 1y30y.

3. 2y2s10s CMS Curve Cap

• Entry: 22bp
• Current: 24bp
• Target: 85bp
• Stop: 7bp
• Carry: -0.8bp/month
• Reason: CMS curve caps are seen as a good hedge against a weakening economy. They are long volatility and profit from yield curve steepening. They also offer protection in bear steepening scenarios, with limited downside risk.

Market Outlook

• Volatility: Volatility is expected to remain close to fair value, with potential for 10–15% spikes not explained by the regression model.
• Curve Shape: The yield curve is expected to continue flattening, which could result in a modest decline in volatility, with an estimated drop of 2.3bp if the 2s10s swap curve reaches zero.
• Economic Risks: A weakening economy and potential rate cuts could lead to yield curve steepening, which would support volatility levels.

Supporting Figures

• Fig. 1: Shows the shape of the curve driving volatility over the last two years, highlighting the relationship between curve shape and volatility.
• Fig. 2: Demonstrates that the 6m5y volatility is close to fair value based on the regression model.
• Fig. 3: Indicates that Formosa bond issuance has remained flat since April, limiting volatility pressure.
• Fig. 4: Highlights the monthly change in the 5y30y/1y30y volatility ratio.
• Fig. 5: Suggests that volatility may rise when the economy turns.
• Fig. 6: Shows that both the yield curve and CMS curve volatility remain low.

Disclaimer

• This document is a marketing communication and not investment research.
• It is not independent research and may be subject to conflicts of interest.
• The information is based on public sources and not independently verified.
• No liability is accepted for any loss arising from reliance on the document.
• The document is intended for professional clients and eligible counterparties.
• The information is not a prospectus and does not constitute an offer to sell or purchase any financial instrument.
• No investment advice is provided, and the document is for informational purposes only.
• Performance data is based on back-testing and simulations, not actual results.
• Indicative prices are based on internal models and may differ from other sources.