As expected (see here), since last month we have seen a spectacular return of vols in rates. Definitely helped by ECB's Draghi's comment. From lowly 40s in April, 3m10y straddle in EUR now trading @ 81 normal bps vol, with half of it coming off in last two weeks. And in spite of that, on realized basis, you can hardly call any part of gamma surface rich to buy, convincingly. This will of course retrace from here to some level down, but this increased vols are here to stay for rates for a while.
What is interesting, how this sell off has played out in the skew space. The skew exploded across tenors in the gamma space. However, the pattern that emerges across the surface on closer look is more nuanced. On 5y and 10y tails, the realized skew is steeper on the payer side as well as has a parallel shift to a higher vol at the money. Whereas on the longer end it is more about getting the slope wrong, i.e. receivers are cheaper and payers are richer in realization. And as we walk across the maturities, the realized skew simply fail to live up to the expectation priced in implieds (click to enlarge)
This means receivers on the 30y is rich, payers on intermediate and Vega rich, and these are true more for USD than EUR.
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