FxWirePro: How Does Interest Rate Derivatives Look Like After January FOMC Minutes?

The US markets came back to life following the release of the January FOMC minutes, and OIS briefly softened its inversion into early December.

2019’s rebound in risky assets has left the risks around LDI hedgers roughly balanced, and the 5s/30s spread curve looks fair at this point; take profits on short WNH9 invoice spreads vs 5-year swap spreads.

A bearish start to the H9/M9 Treasury futures roll has juiced a continued cheapening in the front futures complex relative to cash, and we take profits on box spreads and synthetic calendar spreads expressed via TUH9.

While volatility continues to climb in daily Libor fixings, signals in both the cash and derivatives markets point steadily towards cheaper USD funding.

The US 10yr treasury yield ranged between 2.63% and 2.66% so far, while the 2yr yield fell from 2.49% to 2.48% before bouncing to 2.50% after the FOMC minutes. Futures markets continued to price little chance of any further Fed rate hikes in this cycle. The FOMC minutes elaborated further on the message that the Fed is on hold while the economic outlook is uncertain: “Many participants suggested that it was not yet clear what adjustments to the target range for the federal funds rate may be appropriate later this year”. The hurdle for further rate hikes was pinned mainly to inflation and economic growth: “… only if inflation outcomes were higher than in their baseline outlook”. That said, the labor market was seen as strong, and inflation near the target.

The Dallas Fed manufacturing index will provide another timely update on the sector. However, it is less closely watched than the equivalent indices for the Philadelphia and New York Fed Regions, or indeed other measures such as Friday’s ISM index. Other US manufacturing indicators have so far painted a variable picture of February. Courtesy: JPM

Currency Strength Index: FxWirePro's hourly USD spot index is inching towards -104 levels (which is bearish) while articulating (at 12:38 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex