RBC’s Michael Cloherty, in a note on today’s big FOMC announcement, declares: FOMC: Watch the press conference, not the statement.The official statements should be predictable: The Fed will likely heighten up their acknowledgements that Europe is a concern again, and they may say something about last month’s soft jobs report. On the other hand, given the fall in the unemployment rate, the projections of those members should decline. The statement about not raising rates until 2014 is unlikely to change.
As for the press conference at 2:15 today, here’s Cloherty:
When thinking about the press conference, it is important to remember that just before the March meeting the WSJ ran an article saying the Fed was studying the best form of additional asset purchases: more Operation Twist, sterilized QE, or regular QE. From the FOMC minutes, we know that issue was not discussed at the one-day meeting in March. But we think it will be discussed at this week’s two-day meeting.
We continue to think that any additional stimulus would come in the form of traditional unsterilized purchases of MBS. However, as we saw in the March selloff, the extended period language has pushed the market into structural carry & roll trades, which are highly vulnerable to being flushed out if there is any doubt about carry. Currently, there seem to be a number of crowded trades where leveraged investors are long shorter maturity Treasuries in a variety of forms—outright, versus OIS, versus LIBOR, and versus 2yr futures contracts.
The common theme in these trades is that repo rates are expected to fall as bill supply drops in the wake of April 15th tax payments. If the Chairman raises expectations of sterilized QE, it would dramatically change the outlook for repo rates, sharply altering the carry assumption in all of longs at the front of the Treasury curve. If the Chairman says anything positive about sterilized QE, we would expect this to trigger a flush that would push 2s back to 35bps, with sharp movements in spreads versus OIS, LIBOR, and futures contracts.
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