JPMorgan Econ FI-Interest Rate Derivatives The Fed, walking a tightrope, find...-107172523

SriniRamaswamyAC(1-415)315-8117PhilipMichaelides(1-212)834-2096NorthAmericaFixedIncomeJPMORGANsrini.ramaswamy@jpmorgan.comphilip.michaelides@jpmchase.comStrategyJ.P.MorganSecuritiesLLCJ.P.MorganSecuritiesLLC22March2024IpekOzil(1-212)834-2305ArjunParikh(1-212)834-4436ipek.ozil@jpmorgan.comarjun.parikh@jpmchase.comJ.P.MorganSecuritiesLLCJ.P.MorganSecuritiesLLCInterestRateDerivativesTheFed,walkingatightrope,findsbetterbalance•Severalcentralbankstookadovishturnthisweek.WhiletheSNBdeliveredasurprisecut,theBoEaswellastheFedmaintainedpolicyratessteadywhileindicatingapredis-positiontoeasesoonaslongasupcomingdatacorroboratesdisinflationarytrends•Thedovishpolicybentdidlittletoimprovepolicyuncertainty,giventhedependenceonfutureeconomicdata.Optionsmarketscontinuetoassignsignificantandsimilarweightstoshallow-easingoutcomesaswellasdeeper-easingscenarios.Thisisunlikelytochangeuntilwegetmoredata•Ourswapcurvefairvalueframeworksuggeststhatswapyieldcurvesarelikelybiasedflatterrelativetowhatiscurrentlypricedintotheforwards,exceptintheeventthatdeep-erratecutsarerealized.Thisarguesforyieldcurveflattenersexpressedinwaysthatmitigatetheriskofdeepercuts…•…initiate1Yforward2s/5scurveflattenerspairedwithweightedlongsinH5andH63MSOFRfutures(20%and10%respectively)...•…and/orinitiate2s/5scurveflattenersconditionallyinasell-offusing3...