March 21. FOMC day
–Fed day. Powell’s first as Chairman. The market seems to be geared up for a bearish hike, with upgrades in growth projections and a rise in the Fed dots. We had already priced increased growth estimates, and while the market is on the same page as the dots for 2018, the Fed hadn’t been able to hit targets for years prior to now. Maybe the dots will move a bit higher in 2019 and beyond….will initial selling be sustainable? Jan 2019 FF are already fully priced for 3 hikes in 2018 at 9782.0. Just for interest, FFF20 is at 9742.0, a spread of just 40 bps to FFF9.
–Yesterday yields pushed higher, with tens +3.6 bps to 287.9. Some pressure attributed to inbev’s $10 billion bond issuance.
–One large trade was a buyer of >100k 0EM 9700ps for 4.0 to 4.5, from futures price 9722 to 9721.5. These puts settled 4.0 ref EDM9 9721.5 (exchange volume showed 174k trading). Helped push EDM8/EDM9 to 44.5 (and it was 45 bid late). IF the Fed does raise 2019 and beyond dots, then perhaps a spread of 40 for FFF9/FFF0 is too low, and EDM8/EDM9 is too low, so it makes sense to load up on puts on EDM9. Libor/ois continues to grind higher, with, for example EDM8 vs FFN8 settling at 46.5, out 2.5 on the day.
–Atm green and blue midcurve straddles now identical. Blues had held 2-3 bp premium advantage a couple of months ago. 5/30 notched a new low of 43.1 bps.
