Buyers were seeking high-strike caps and out-of-the-money cap/floor straddles last week because of a belief that volatility would increase in the front end of the curve. Traders said that the activity was likely driven by customer flow. Buyers are banking on increasing volatility in the short end because of the beginnings of an economic recovery coupled with uncertainty in the Middle East and the rise in oil prices.
Many of the trades went through Monday, traders said, noting that activity early in the week is unusual. EUR1 billion of 10-year swaptions with 10% caps along with EUR2.2 billion of four-year options to enter eight-year swaps with 8% caps. In addition, EUR1 billion in one-year out-of-the-money straddles with around 5% strike prices went through. On Thursday, EUR750 million of 10-year swaptions with 8% caps traded.