Morgan Stanley Fixed-Global Macro Strategy US Rate Volatility Screener-110581122

M UpdateGlobal Macro Strategy | North America US Rate Volatility ScreenerWe analyze price action in US interest rate volatility markets, particularly in OTC (vanilla, curve, and forward vol) and CBOT options. Data are as of October 2nd, 2024. Morgan Stanley & Co. LLCFrancesco GrechiStrategist Francesco.Grechi@morganstanley.com +1 212 761-1009 Top Trade Idea in US Rates Volatility: l Maintain Sell 1.77x notional 3m30y straddles vs. buy 1x notional 1y30y straddles (delta hedge both legs; initial target vol parity; stop-loss vol ratio of 1.15x): The vol surface has flattened to YTD highs, and should normalize as more clarity is ascertained regarding the cutting cycle.l Maintain short FV 110.25 vs. long US 125 10/4 expiry straddles in a 3.18:1 ratio: Upon entry, NFP-Friday expiry options were pricing a large amount of front-end volatility (FV/US ATMF straddle BE ratio was 1.32x, ~90th percentile in our 6y dataset).Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.Key TakeawaysGamma was higher this week, with 1m expiries rallying >10bpvExpiry and tail term structures flattened, led by 1m/3m calendarsCurve vol gamma rallied, in part due to implied correlations Forward vol was lower, with 1y forwards screening cheap against midcurves and vanilla Implied vol on USX4 CBOT options increased w/w, but remains near the 25th percentile of realized vol since 2022 October 3, 2024 02:25 PM GMTM Update2 Vanilla VolatilityVanilla vol surface• Gamma was higher this week, with 1m expiries rallying >10bpv (see Exhibit 1 and Exhibit 2 ) • On 1y lookbacks, right side table products are at the upper end of their ranges. The left side largely screens at the middle of its range over the past 1m (see Exhibit 6 ) • On an implied/realized basis for 1w and 1m lookbacks, the entire vol surface screens rich (see Exhibit 8 , Exhibit 10 , Exhibit 12 )• Vols with <3m expiries have negative vol roll-down across tails, most notably so for right-side tails Exhibit 1: Current vanilla ATMF implied volSnapshot of vanilla ATMF implied vol1y2y5y10y30y1m114.3122.0109.497.491.53m118.4118.4110.8101.193.56m117.4115.1106.198.791.11y116.5111.3102.997.089.12y108.1105.699.795.087.23y103.6101.397.193.485.95y98.996.893.990.683.810y91.789.986.081.975.8TailExpiry Source: Bloomberg, Morgan Stanley Research Exhibit 2: 1-week change in vanilla ATMF volChange in Vanilla Swaption Vol (1w)Change: 25/09 to 2/101y2y5y10y30y1m19.218.812.710.112.43m5.03.12.72.93.66m2.01.72.51.41.81y2.91.41.21.11.02y0.00.00.60.50.13y0.0(0.5)0.40.70.15y(0.0)(