Vol under control amidst panic, WHY? and More...

1. Option traders have doubled up on the possibility of the Fed dialing back up on the rate hike cycle. They think that the Fed shall soon pivot back from hiking at a pace of 75bos every meeting to eventually cutting rates. The options market digressed from the swaps market as the latter still believes the terminal rate around 5%, while the former is adding bets on the overnight repo to be 2% by next September.

2. Oil witnessed one of the worst weeks in the last 7 months. It slid by 10% due to the rising covid cases in China, falling industry PMI numbers in Europe, and increased supply news from the US.

3. Fed announced that they would stop supporting the MBS markets a year back and ever since the MBS spreads have been increasing. Rate vols: The long end has strongly followed the underlying swap rate but the front end swap vols don’t remit a good relation with the swap rates. This is rare and also indicates the rising uncertainty of the rate path Fed would take to assure a soft landing.

4. Tech high yield spreads have widened to the highest levels in the last 10 years. This comes after the recent layoff wave in the top FAANG companies and terrible quarter performance. The HY tech sector spreads crossed the HY index spreads almost a year back indicating problems in the sector which have now manifested in the recent quarterly reports.

5. The vol of vol has declined to multi year lows with VIX stable near 20 from last 3 weeks. The implied vol of the short dated 3 VIX options has fallen to 2014 levels. Vol of Vol is a key driver in the butterfly strategies, which have high volga (or the gamma of vega) exposure. Therefore, wings that are more OTM haven't performed as well.

6. A flat money market curve has historically been associated with lower vols, but this time the current levels of realized vols in the EURIBOR market is supporting implieds. With the market already pricing a terminal rate of 3%, should see the yields on both the contracts decline.

7. European banks have started repaying their pandemic emergency loans back to ECB, but not at the pace ECB expected. The repayment represents just 15% of the loans. This comes after the ECB increased the charge banks would have to pay to park extra cash from the loans disbursed since a large chunk of that amount is unused.

8. Interesting Charts: