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12 Apr, 4 tweets, 2 min read
US Swaption/Rates Vol off highs but still elevated

Reasons:
▪️ Economic data ahead; CPI tom; Fed data dependent
▪️ UST supply, 3y 10y 30y auctions this wk
▪️ US ylds, off highs, still close to higher end => risk premium in vols
▪️ Market v/s Fed disconnect on Rate Hike

1/4
▪️ SEP-based June FOMC important => till then would have got two more NFPs & Inflation data till May incorporating Apr/May base effect + stimulus based spikes => little kink around 3m in vol curve
▪️ Vol Skew mildly softer but still topside nervousness (convexity hedging)

2/4
▪️ Chart: 3m Expiry Vol across Swap Tenors => Front end swap tenors least volatile as anchored by Fed Fund/OIS/T-Bill yields

▪️ Chart: 3m10y Swaption Vol v/s 10yr US Yield: higher yield => higher vol as reflected in Vol Skew

3/4
 @bondstrategist
Basic Swaption recap:
▪️ Option on USD Interest Rate Swap (IRS); Call (Payer); Put (Receiver)
▪️ Two time horizons:
1⃣ Tenor of underlying swap
2⃣ Maturity/expiry of option
▪️ Vol Cube => Vol across Strike vs Tenor vs Maturity
▪️ 3m10y => 3m Expiry Option on 10yr USD IRS

• • •

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Varad Markets Profile picture
12 Apr
#US #CPI March #Inflation tomorrow:

🚩Headline Exp 2.5% (vs 1.7% Feb)
🚩Core Exp 1.5% (vs 1.3% Feb)

▪️ That +1.0% gap would be largest Headline v/s Core CPI gap since 2011 on huge Energy driven base effects; 5yr avrg gap -0.20%, 2yr avrg -0.37%

1/4 Image
▪️ Chart: Energy Inflation indeed so volatile
▪️ Food Inflation key contributor since COVID - likely to ease off marginally on base effects
▪️ Energy base effect => massive spike to Headline over Apr/May => Headline vs Core likely to diverge further

@chigrl
2/4 Image
▪️ Energy Inflation, negative recently, was +2.4% Feb, could jump to as high as +8.5% yoy in Mar & +20% in April
▪️ Energy Index collapsed Apr/May'20 but Food Index jumped => opposite base effects

3/4
 ImageImage
Read 4 tweets
Varad Markets Profile picture
8 Apr
India #RBI formally launches #QE:

▪️ Named 'Government Securities Acquisition Programme', G-SAP 1.0
▪️ Commits to specific amt of G-Sec purchases (INR 1.0 trn in Q1 FY2021-22)
▪️ At annualized INR 4 trn, that is ~7% of RBI Balance Sheet BS (Fed's $1.44 trn QE => ~19% BS)

1/5
G-SAP = YCC?
▪️ While RBI prefers 10yr yield to be ard 6.0%, formal Yield Curve Control YCC targets specific yld for specific tenor (BOJ Japan & RBA Australia) => unknown amt of bond purchase to meet yld target
▪️ RBI's G-SAP more QE (pre-announced amt) than YCC

@dugalira
2/5
G-SAP v/s OMO?
▪️ Practically not much diff but RBI generally does not commit to purchase amt under OMO
▪️ OMO more for liquidity mgmt => inject as well as absorb liquidity
▪️ QE purchase necessarily injects liquidity; targets backend ylds => BS expansion => Reserve Money ⬆️

3/5
Read 5 tweets
Varad Markets Profile picture
16 Feb
Trading #US $Dollar: Basic Macro Construct

Two key Dollar drivers:

#1 Growth/Inflation/Risk-sentiment (y-axis)=> Inflation Breakeven (BE) (/ Equities)

#2 Nominal Interest Rates (x-axis) => 10yr US Treasury Yield

1/10
Q=Quadrant

Q1: Risk-On-Lower Real Rates => Short USD
Q1: Risk-On-Higher Real Rates => Long USD
Q2: Goldilocks => Risk-On-Lower Nominal/Real => Short USD
Q3: Risk Off => Lower Rates => Equity Sell off/Bond Rally => Long USD
Q4: Risk Off => Equity & Bond Sell off => Long USD

2/10
Performance since COVID, Mar'20
Q1:
- Higher BE/Risk On + Higher Nominals => 31% of all observations
- Good success (85%) on Short USD under lower Real (18.4% of obs)
- But higher Real under Risk On only 20% success on Long USD
- So despite higher Real, USD lower on Risk On
3/10
Read 10 tweets
Varad Markets Profile picture
6 Feb
#DiveIn: #Inflation Breakevens (BE)

Given immense focus on fiscal, monetary & inflation dynamics, quick brush up on Inflation BE:

BE = Nominal Rate, N (US Treasury Yield) – Real Rate, R (US Treasury Inflation Protected Securities, #TIPS Yields, T)

1/8
BE = inflation level that makes investor indifferent b/w buying UST or TIPS
= (approx) market-based measure of risk neutral inflation expectations
= TIPS indexed to non-seasonally adjusted #CPI

10y BE = (10y Nominal Treasury yld) - (10y TIPS yld) = 1.16% - (-1.04%) = +2.20%

2/8
Breakevens (from TIPS) actually do not capture pure inflation expectations

Nominal N = Short end Real + Term Premium + Inflation Expectation IE + Inflation Risk Premium IRP

TIPS Real R = Short end Real + Term Premium + Liquidity Premium LP

BE = N – R = IE + IRP – LP <> IE

3/8
Read 8 tweets

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