Last week we saw the highest surge in USD swaption activity since the start of Nov 2023. Across all expiry-tenor pairs, there was almost $300k of gamma and $27mm of normal vega in trading activity reported, compared to an average of $150k gamma and $21mm vega in the first two weeks of Nov.

The big macro driver behind this was the US inflation report released on Tues, which saw the October reading fall more than expected to 3.2 per cent. This was also the first decline in four months, prompting long-end swap rates to fall by around 20bps by the end of the week.

As expected, most of USD swaption activity for the week was concentrated on the day of the inflation report. There was a three-fold spike in gamma trading activity, with $150k in gamma trades reported over all expiry-tenor pairs vs. a daily average of around $50k.

Looking at the breakdown of the expiry-tenor pairs making up this surge in activity, there are other interesting observations. The three swaption points 3m30y, 3m10y and 3m15y collectively make up more than 50% of both the gamma and vega reported on Tues. The fact that greater than 10y tenors dominated the activity can be explained by the fact that the longer-end of the swap curve reacted more violently to the inflation data than the shorter-end. In fact, the longer-end of the curve has been the most volatile since Q3 of this year as a less active Fed meant focus has shifted away from the front-end rate direction towards the supply-demand questions for the back-end. In terms of expiry, with so much activity focused on 3m expiries, it would suggest that there is demand in the market for protection against further rates volatility going into year-end and the start of 2024.