June 19. FOMC: no change, keep reaching for yield
–The Fed claims to be concerned about “financial stability”, but its actions only fuel the trend of reaching for risk to capture the last few available basis points. New highs in stocks. New low in VIX. Bonds rally. The dollar falls.
–The dots are becoming less meaningful, though the slight increases in rate forecasts for 2015 and 2016 and the decline in the “longer term” rate was perhaps part of the reason for the flattening. Red/gold pack spread plunged nearly 7 bps to 220. In treasuries, 2/10 spread fell 3 to 214 (started the year at 260). Implied vol was already under pressure prior to the Fed announcement, but was hit further late in the session. For example, Green Sept 9812 straddle settled 37 on Monday, was sold at 35.5 before FOMC and settled 34.5. Large seller late of 30k Green July 9787p at 2.0 (just over 3 weeks until expiry, 22 bps away). I marked 30yr bond vol at 7.0%, close to the low of the year, which was 6.5. A piece on ZeroHedge from JPM suggests that low volatility is a function of low trading volumes and option hedging, but is likely too low given the “fundamentals”.
http://www.zerohedge.com/news/2014-06-18/beware-fridays-opex-jpmorgan-warns-volatility-too-low-disconnected-fundamentals
–Today’s news includes Jobless Claims expected 313k. Philly Fed 13.0 and Leading Indicators +0.6.
