ECB Signals Steady Rates Ahead as Policymakers Warn of Inflation Risks 
South Korea Warns Weak Won Could Push Inflation Higher in 2025 
Austan Goolsbee Signals Potential for More Fed Rate Cuts as Inflation Shows Improvement 
Brazil Holds Selic Rate at 15% as Inflation Expectations Stay Elevated 
Hong Kong Cuts Base Rate as HKMA Follows U.S. Federal Reserve Move 
RBA Holds Rates but Warns of Rising Inflation Pressures 
Fed Near Neutral Signals Caution Ahead, Shifting Focus to Fixed Income in 2026 
In the recent past, markets have been so cautious on the potential impact of Fed balance sheet normalization on interest rate volatility markets.
At a high level, though in principle the return of significant mortgage risk to the private market could drive a bid for gamma, in practice we find that options hedgers are unlikely to take down much of this supply. This suggests the direct impact on vols should be limited.
While markets have priced in a rather aggressive normalization, as net T-bill issuance again turns negative into April, and with no debt ceiling resolution expected prior the fall “drop-dead” date, we expect repo to remain rich to Fed funds.
Receive in $100k/bp of a 3Mx3M GC swap versus paying in $100k/bp of a 3Mx3M OIS swap at @ a spread of -1bp (both swaps start on 6/30/17 and mature on 9/29/17).
Stay long1-year expiry A+10 2s/5s curve caps versus A-20 curve floors.
Stay long $1bn notional of 1-year single-look A+10 2s/5s CMS curve caps (observation date 3/19/18, strike 0.41%) versus $1bn notional of 1-year singlelook A-20 2s/5s CMS curve floors (observation date 3/19/18, strike 0.11%) at a premium of 4.25c. P/L since inception: -1.2bp.
