Strong demand has hoisted volatility on so-called swaptions, or options on interest rate swaps, which give the buyer the right to enter into a contract in the future at a pre-determined price.
Volatility or “vol” is a key measure of how much risk is perceived, and is a major input in the price of an option.
The surge in hedging in the swaptions market has come from fixed-income investors and equity portfolio managers who would normally not hedge using rate options, market participants said.
“Equity managers understood very well the risks of a tighter Fed and tighter financial conditions to portfolios and found a decent hedge in the rates vol space,” said Bruno Braizinha, director, U.S.
“Not only did equity guys buy vol, they bought directional vol.
In late March, normalized vol hit 152 basis points, the highest since at least February 2013, according to Refinitiv data.
The U.S swaps forward market sees the terminal rate hitting between April 2023 and April 2024 at roughly 3%, based on the one-year and two-year forwards of one-year swap rates, analysts said.