JPMorgan Econ FI-Interest Rate Derivatives What’s the rush-106678072

SriniRamaswamyAC(1-415)315-8117PhilipMichaelides(1-212)834-2096NorthAmericaFixedIncomeJPMORGANsrini.ramaswamy@jpmorgan.comphilip.michaelides@jpmchase.comStrategyJ.P.MorganSecuritiesLLCJ.P.MorganSecuritiesLLC23February2024IpekOzil(1-212)834-2305ArjunParikh(1-212)834-4436ipek.ozil@jpmorgan.comarjun.parikh@jpmchase.comJ.P.MorganSecuritiesLLCJ.P.MorganSecuritiesLLCInterestRateDerivativesWhat’stherush?•Fed-speakcontinuestosignalpatienceandadesiretoseemoredatasupportingdisinfla-tionarytrendsbeforebeginningtoeasepolicy,evenasgrowthandinflationdataremainstrong.Thisismanifestingasrisingpolicyuncertainty.AcloserlookattheDec2024SOFRfuturesimplieddistributionsuggeststhatmodaloutcomesremaincenteredaround5cutsovertheremainderoftheyear,buttherelativeweightonalternativesce-narioshaverisen.Currently,optionsmarketsareconsistentwithasizeableweightona1-more-hikescenarioinadditiontothemodalscenarioof5cuts•Elevatedpolicyuncertaintyissupportiveofhighrealizedvolatility.Smallshiftsintherelativeweightsofdifferentpolicypathscanleadtosignificantmovesinforwardyields.Indeed,itistellingthatYE24forwardOIShastradedinan80bprangeinrecentmonths,eventhoughthemodalscenariohasremainedthesameat5cuts.Thishelpstokeepjumpriskelevated,andissufficienttocauseustomaintainourbullishbiasongamma,espe-ciallyatthefrontendofthecurve•Atthesametime,impliedson...