swaption activity to be muted over last week. Surprisingly, there was interesting
trading activity reported on other days, making it the second highest week in
terms of gamma trades reported since the start of Nov 2023, with a total of
$220k of gamma reported. On the vega side, last week was indeed quieter with
only $15mm of vega trades reported compared to the weekly average of over
$20mm in Nov.
Breaking down the gamma activity by trading days, we observe a flurry of trades
Breaking down the gamma activity by trading days, we observe a flurry of trades reported on the day before Thanksgiving, totaling $140k of gamma. This amount is surprisingly close to the trading activity recorded after the US inflation reading was released the week before.
Looking at the specific swaption points that contributed to the surge in gamma activity last week, we note an interesting difference compared to the previous week. During last week, the swaption points 1m10y, 1m30y, and 1m20y accounted for around 50% of the gamma risk. In contrast, trading after the US inflation report in the previous week was dominated by 3-month expiries. This difference could be driven by the fact that swap rates had been declining for five consecutive days leading up to last Wednesday, thereby increasing demand for shorter-dated protection before many market participants headed off for a long Thanksgiving weekend.
It's worth highlighting that 1m20y ranked high in terms of reported gamma, despite being a fairly illiquid point. As can be seen in the graph below, the last time 1m20y was reported in a comparable size was about one month ago, with sporadic trading in between. This may have an interesting connection to the vega side of the market, where 10y10y was the most actively traded point. Given that both 1m20y and 10y10y have a total maturity of around 20 years, this potentially indicates hedging in the market for 20-year Bermudan callable bonds.
