Powell today
August 27. 2020
–Powell today at 9:10 EST with new and improved Fed Framework. He’s expected to move towards inflation averaging,and emphasize forward guidance. A BBG headline notes ‘Fed seen holding rates at zero for five years’. The market already seems convinced of that as evidenced by yesterday’s stellar 5-yr auction at 29.8 bps. Positive carry of 20+ bps for 5 years, IF the Fed holds rates. Today we have $47 billion 7 years; the yield on the w/i is 48, so there’s a bit less certainty for years 6 and 7.
–In spite of the solid auction, yields were still slightly higher with a steeper curve yesterday. 2/10 ended at 53.3, up 0.7 bp. Longer end vol has remained bid going into Powell’s speech, with US (30yr) rising steadily through August. The eurodollar curve also gives an indication of increasing uncertainty, or perhaps I should say an increasing expectation of a Fed rate hike further out the curve. This can be observed in one-year pack spread calendars. Whites to reds (1st yr to 2nd yr) is -1.0, reds to greens (2nd to 3rd) is 6.125, greens to blues (3rd 4th) 13.5 and blues to golds (4th 5th) is 18.625.
–There has been good size selling of TYV 140c this morning pre-Powell, with volume near 60k, most large clips at 13 to 12 ref 139-07+/08. Open interest was 85k coming in. Perhaps a reasonable sale with expectation of a less well rec’d seven-year and a Fed hell-bent on boosting inflation, but it’s not going to look so good if one of those missiles China is firing accidentally hits a US target.
