Interest Rate Derivatives From Dovish Pause to Hawkish Easin...-110414187

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 Strategy20 September 2024J P M O R G A N•The Fed delivered its first rate cut of this cycle on Wednesday, and the magnitude of the cut was on the larger side of consensus expectations, but in line with our own. However, passing of the FOMC meeting has not translated into significantly better clarity on the path of the funds rate going forward•With policy uncertainty still elevated, given the overall bearish sentiment emanating from this week's 50bp rate cut, and given upside risk to the terminal rate relative to cur-rent forwards, we continue to favor gaining asymmetric exposure to higher yields in the Reds ...•… initiate weighted Greens / 15s flatteners. Empirical evidence suggests that this curve will likely be locally flat, but should outperform asymmetrically in a selloff ...•… and initiate conditional exposure to a flatter 1s/5s curve in a sell-off using 3M expiry payer swaptions. The curve is weighted to make it premium-neutral at inception, while still maintaining directionality •Macro drivers do not point to a clear directional bias in swap spreads and we maintain our neutral stance on swap spreads across the curve ...•… but recommend initiating exposure to 2s/3s swap spread curve flatteners. This curve appears too steep, and we believe investors such as banks will find it attractive to deploy their spread risk budget on 2s versus 3s given the attractive pick over IOR relative to risk•Markets are likely to remain in a lull until the next employment report, causing us to turn tactically bearish on short expiry volatility in intermediate and longer tails, and turn neutral on short expiry volatility on short tails•At a more nuanced level however, we recommend initiating long exposure to the volatil-ity of the second principal factor, by buying 1Yx3Y straddles versus 105% of the vega-weight in 1Yx10Y straddles. This weighted spread is at year-long lows, and the package is approximately carry-neutral, which makes it attractive to initiate in our viewFrom Dovish Pause to Hawkish EasingAs widely expected, the Fed delivered its first rate cut of this cycle on Wednesday. However, the magnitude of the cut was on the larger side of consensus expectations (but in line with our own). Expectations going into the meeting were roughly evenly split between a 25bp and a 50bp cut. But despite the larger-than-forwards rate cut, the broader themes emanating from the meeting were hawkish relative to expectations. The tone of the post-meeting press conference was somewhat hawkish, causing yields to rise rather than fall as has typically been the case in recent meetings. Fed Chair Powell offered little gu