Taiwanese troubles; Formosa bonds and US interest rate volatility

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Financial Times 13h ago

Taiwanese troubles; Formosa bonds and US interest rate volatility - Financial Times

Quick Summary:

In practice, as Younger and Setser explained, they function as selling US interest rates volatility and in the process probably helped dampen US mortgage costs.

The transmission mechanism that USD rate vol market investors are concerned about involves one in which Taiwanese insurers unwind their callable exposure, causing a scramble for vega buying.

As a second order effect, one reason why the skew in volatility in long expiries is so high (low strike volatility lower than high strike volatility) is because the market expects vol supply to come back in low rate scenarios.