J.P.Morgan: Recommend Selling 3Yx10Y Vs. 10Yx30Y Volatility

J.P.Morgan recommend "selling 3Yx10Y versus 10Yx30Y volatility. The former has richened substantially in recent weeks and is now nearly the richest vol on the surface. This is quite unusual historically; over the past ten years 3Yx10Y has only been this rich compared to the highest benchmark point on the grid ~20% of the time. By contrast, 10Yx30Y is closer to the middle of the range by this measure. Combined with a tailwind from slowing callable supply as the Q1/Q2 glut is gradually recycled by dealers, we favor positioning for normalization of this ratio. Vega has cheapened of late despite the bullish fundamental set-up of fading supply."

• The structure that they recommend involves buying $17mn of 10Yx30Y ATMF straddles (notification: 6/4/31, expiry: 6/6/61, strike: 2.07%) vs. selling $50mn 3Yx10Y ATMF straddles (notification: 6/4/24, expiry: 6/6/34, strike: 2.15%) at a spread of -15abp.
• They note that they "had previously been positioned with shorts in 5- versus 1-Year expiries in 30-Year tails, but this position has reached out target P/L and we recommend taking profits here."