1Srini Ramaswamy AC (1-415) 315-8117srini.ramaswamy@jpmorgan.comJ.P. Morgan Securities LLCIpek Ozil (1-212) 834-2305ipek.ozil@jpmorgan.comJ.P. Morgan Securities LLCPhilip Michaelides (1-212) 834-2096philip.michaelides@jpmchase.comJ.P. Morgan Securities LLCArjun Parikh (1-212) 834-4436arjun.parikh@jpmchase.comJ.P. Morgan Securities LLCNorth America Fixed Income Strategy26 January 2024J P M O R G A N•Much awaits next week, with the FOMC meeting as well as Treasury�s refunding announcement coinciding with month end. The FOMC is likely to hold rates steady and shift from a tightening to a neutral bias, while the refunding is likely to bring another round of coupon auction size increases in line with the guidance from late last year. But under the hood, there will likely be a lot to look for in the details •Separately, the Fed tweaked the BTFP program this week to erase the riskless arbitrage represented by the gap between IOR and term BTFP funding rates. On the margin, this should result in slightly faster BTFP balance runoff and a corresponding decline in Reserves. Our revised projections for the Fed�s balance sheet size and liabilities incorpo-rates this as well as a true-up to spot balances. Thanks to already lower spot levels, O/N RRP balances are projected to fall to below ~$300bn by September, which in turn could cause QT to end by then•Swap spreads in the belly remain narrow relative to fair value, although the gap has shrunk steadily since year end. We continue to see value in swap spread wideners in the 5Y sector•At the front end, with spreads wide to fair value, with the 2s/5s UST curve likely biased flatter and with RRP balances expected to decline further, we now look for narrower swap spreads. We recommend positioning for this via 2s/5s weighted spread curve steepeners, given the widening risk posed by spreads in the belly•On the swap yield curve, with next week�s FOMC likely to reaffirm our expectation of a Fed that will lean against premature easing, carry and roll-up trades remain attractive as a theme. We recommend positioning for a flatter near-spot 2s/5s swap curve paired with 2Y forward 2s/5s steepeners, to position for carry that is attractive relative to risk in addition to offering attractive entry points relative to fair value•We continue to recommend a bullish stance on volatility. Recent declines in implied volatility have been idiosyncratic and in excess of expectations based on underlying drivers, and a nascent retracement is underway. With shorter tails offering the most remaining retracement potential, we recommend maintaining exposure to higher implieds in shorter tails•In the 10-year tail sector, the cheapness of 6Mx10Y relative to 1Yx10Y offers an attrac-tive opportunity to construct long gamma exposure via a 1:1.1 vega weighted straddle calendar spreadAll eyes on WashingtonAll eyes will undeniably ...
