JPMorgan Econ FI-Interest Rate Derivatives Soft landings, TouchdoWNs, and Saf...-106450323

SriniRamaswamyAC(1-415)315-8117PhilipMichaelides(1-212)834-2096NorthAmericaFixedIncomeJPMORGANsrini.ramaswamy@jpmorgan.comphilip.michaelides@jpmchase.comStrategyJ.P.MorganSecuritiesLLCJ.P.MorganSecuritiesLLC09February2024IpekOzil(1-212)834-2305ArjunParikh(1-212)834-4436ipek.ozil@jpmorgan.comarjun.parikh@jpmchase.comJ.P.MorganSecuritiesLLCJ.P.MorganSecuritiesLLCInterestRateDerivativesSoftlandings,TouchdoWNs,andSafetyintheEndZone•YieldsarehigherthisweekonthebackofstrongdataandFed-speakthatcontinuestosignaladesiretoseesustaineddisinflationbeforeeventuallycuttingrates.Butoptionsmarketimplieddistributionspointtoasignificantweightingonatailriskscenariothatcouldbringaggressivecuts•Withsuchatailscenariobeingdramaticallydifferentfrombaselineeasingexpectations,policyuncertaintyremainsconsiderable,andiscreatingasupportivebackdropforele-vatedday-to-dayvolatility.Butratesarealsorangeboundandmean-reverting,becauseofwhichrealizedvolatilitybasedonlessfrequentsampling(suchasbiweekly)ismuchlower.Whileweacknowledgethisheadwind,weneverthelessremainbullishonvolatil-ityonthebackofheightenedpolicyuncertaintyandlingeringtailrisk•WithforwardOISratesstillbelowmodalexpectationsforthepathoftheFed,carrytradesontheswapyieldcurveremainanattractiveproposition,butwepreferimple-mentingthemconditionallyinasellofftomitigatethedownsideintheev...