利率衍生品2020年展望：一往无前

1、Interest Rate Derivatives2020 OutlookWalk thelineNorth America Fixed Income Strategy26 November 2019Note: This piece is part of the US Fixed Income Markets 2020 Outlook, featuring our strategists views on the year ahead across asset classes.Table of Contents | PDFThis year was marked ups and downs i

2、n the macro outlook, but Note: This piece is part of the US Fixed Income Markets 2020 Outlook, featuring our strategists views on the year ahead across asset classes.Table of Contents | PDF and financing markets have been center focus for much of the second half, as stress in repo markets raised fun

3、damental questions around monetary policy implementationThough year-end should be disruptive, 2020 is set to be a year much more abundant cash in thesystemTreasury supply to the public is set to moderate, including negative net issuance of T-Bills, inflows into MMFs should continue, and the risks ar

4、e biased towards more rather than less aggressive FedinterventionWe look for tighter GC/OIS and FRA/OIS, and wider Treasury/OIS spreads in 2s and 5sLonger maturity basis should take its cues from soon-to-be finalized ISDA fallbacks and hedging around the Big Bang; like 3s/6s narrowers, FF/Libor narr

5、owers, and SOFR/FF wideners at the longendConvexity should remain a driver longer maturity swap spreads; anticipate a narrowing bias as they are more to receive in a rally than in asell-offFading tail risks to the economic outlook, improving liquidity, and persistent programmatic supply are all bear

6、ish for the gamma sector but are cognizant tail risks around pressures, flighty liquidity from high market makers, a to go before lognormality (may may not) kick in, and the upcoming U.S. PresidentialElectionOrganic demand should remain low, but redemptions should support callable issuance; the intr

7、oduction 40-year deals means a noticeable uptick in volatility supply even as notional volumes remainmodestUS Fixed Income Strategy Joshua Younger AC(1-212) 270-1323 HYPERLINK mailto:joshua.d.younger joshua.d.youngerMunierSalem(1-212)270-0317 HYPERLINK mailto:munier.salem munier.salemHenry St John(1

8、-212) 834-5669 HYPERLINK mailto:henry.stjohn henry.stjohnJ.P. Morgan Securities LLCSee page 23 for analyst certification and important disclosures. HYPERLINK / Interest Rate Derivatives 2020 OutlookThis year was marked by ups and downs in the macro outlook, but we are ending on a bit of a down note

9、and financing markets have been center focus for much of the second half, as stress in repo markets raised fundamental questions monetary policyimplementationThough year-end should be disruptive, 2020 is set to be a year ofmuch more abundant cash in thesystemTreasury supply to the public is set to m

10、oderate, including negative net issuance T-Bills, inflows into MMFs should continue, and the risks biased towards more rather than less aggressive FedinterventionWe look for tighter GC/OIS and FRA/OIS, and wider Treasury/OIS spreads in 2s and5sLonger maturity tenor basis should take its cues from so

11、on-to-be finalized ISDA fallbacks and hedging flows around the Big Bang; we like 3s/6s narrowers, FF/Libor narrowers, and SOFR/FF wideners at the longendConvexity should remain a key driver of longer maturity swap spreads; we anticipate a narrowing bias as they are more likely to receive in a rally

12、than pay in asell-offFading tail risks to the economic outlook, improving liquidity, and persistent programmatic supply are all bearish for the gamma sector but we are cognizant of tail risks around GSIB pressures, flighty liquidity from high frequency market makers, a ways to go before lognormality

13、 (may or may not) kick in, and the upcoming U.S. Presidential ElectionOrganic demand should remain low, but redemptions should support callable issuance; the introduction of 40-year deals means a noticeable uptick in volatility supply even as notional volumes remainmodestWalk the lineEven by the sta

14、ndards of recent years, 2019 saw some sizeable shifts in the macro and monetary policy outlook. The panic of late-2018 quickly faded as we moved through the first quarter, with rates stabilizing and equities recovering smartly. Concerns reappeared, however, in early summer, as trade tensions flared

15、once again. In contrast to the prior round of recessionary hand wringing, this time the change in tone came with a similarly striking shift in Fed communications.Markets quickly reversed the two hikes priced for 2019 as of last November, with four cuts within a year priced at points, before re-steep

16、ening in favor of a mid-cycle adjustment. This precipitated a comparable shift in the narrative surrounding fixed income markets, for example as reflected in an NLP analysis of the full corpus of research published this year (Exhibit 1). With policy accommodation continuing to drive markets, bond an

17、d equity returns have remained positively correlated for much of this year.The Fed did in fact switch to an easing bias, lowering rates three times so far this year. More recently, however, their tone has appeared more sanguine.Combined with some firming of the data and fading tails to crash-out Bre

18、xit and/or a complete collapse of U.S./China trade negotiations, we saw a rather dramatic reversal. “Reflation” came back into vogue. But the tone of this discussion arguably outpaced the fundamental and the policy backdrop, and we have since seen market focus shifting back towards the risks to grow

19、th.Exhibit 1: Markets spent most of 2019 fretting over an increasingly uncertain economic policy outlook, only to stage a rapid revision in expectations in recent weeks Z-score of Research Duration Sentiment Index (LHS) versus monthly U.S. policy uncertainty index (RHS); both axes unitlessExhibit 2:

20、 and all the while poor liquidity conditions, especially at the front end, have exacerbated the impact of these shifts in sentiment and kept volatility well bidDuration-adjusted price impact for 2-, 5-,. 10-, and 30-year Treasuries; ticks in 10- year equivalents0.750.500.25Long durationShort duratio

21、nLong durationShort durationZ-score of RDSI (LHS)U.S. economic policy uncertainty (RHS)2Y5Y10Y0.00--0.50-0.75500.400.2Dec-17Mar-18Jul-18Nov-18Mar-19Jul-19Nov-19Note: For details, see Automated Naval Gazer 1.0, J. Younger et al., 10/21/19. Source: J.P. Morgan, Jan 16 Jul 16 Jan 17 Jul 17 Ja

22、n 18 Jul 18 Jan 19 Jul 19Source: J.P. Morgan, BrokerTecWhiplash in expectations has likely been made worse by poor liquidity, which has persisted for most of this year. Though this trend took root in the first half, conditions deteriorated much further over the summer, with depth bottoming out (and

23、price impact peaking) around mid-August. This was most acute at the front end, which is consistent with rapid shifts in monetary policy expectations as the primary driver of overall moves in rates (Exhibit 2). Drops in liquidity were, in our view, exacerbated by the flight of depth provided by high

24、frequency strategies, which has a disproportionate impact on volatility (see Where have all the cowboys gone?, M. Salem et al., 8/14/19 as well as discussion later in thispublication).Though markets have stabilized somewhat, and short-dated vols have cheapened, they still remain elevated relative to

25、 the baseline levels of recent years.Exhibit 3: Mortgages spent most of this year near peak negative convexity, leading to a mostly high level of directionality between swap spreads and rates Option-adjusted convexity of the J.P. Morgan Agency MBS Index; years per 100 bp3Q192Q193Q192Q191Q19CurrExhib

26、it 4: and while active hedgerse.g., REITs, GSEs, and servicerscertainly played a role, the sheer size of commercial banks has led to their dominance of convexity hedging flows Estimated* duration delivery by quarter from REITs, GSEs, and bank servicers (LHS) versus large commercial banks (RHS); both

27、 axes in $mn per bp1.401.601.802.002.202.402.602.803.003.2010Y Treasury Yields; %0100REITs GSEsServicersREITs GSEsServicersComercial banks (RHS)-100-200-300-400Source: J.P. Morgan1Q2Q3QQTD* For details on our methodology for active mortgage hedgers, see A comprehensive look at convexity hedging in i

28、nterest rates, J. Younger et al., 3/29/19; for commercial banks, see Is bank convexity hedging lying in wait?, J. Younger et al., 3/31/19.Source: J.P. Morgan, company filings, FHLMC, FNMA, NYFRBRapid declines in rates also brought convexity-related flows back to the market in force. Mortgages hedger

29、s in particular spent most of this year near the point of maximum negative convexity (Exhibit 3). This was initially apparent in the positive directionality between swap spreads and Treasury yields, which is typically suggestive of rebalancing activity by more frequent delta-hedgers. Consistent with

30、 this we estimate REITs, GSEs, and bank servicers have collectively lost nearly$100mn per bp of dollar durationthough the MSR asset in particular is now mostly burnt out (Exhibit 4). That said, the shift in commercial bank portfolio duration was an order of magnitude larger, and the commensurately m

31、ore impactful driver of swap spreads in the rally.Though convexity hedging was likely the most important single factor for spreads pre-September, the focus then quickly shifted to overnight funding markets. GC rates were poorly behaved at times this yearand not just around month- and quarter-endbut

32、the nearly 300 bp spike around the middle of that month was mostly unexpected. Oversupply of collateral certainly played a role, increasing the opportunity cost of holding cash, both via wider Treasury/OIS and EFFR/IOER spreads. This led larger banks to aggressively reduce their reserve holdings des

33、pite ongoing demands on intraday liquidity from payments and securities settlement (Exhibit 5). The combination of opening balances closer to regulatory limits despite sizeable intraday drawdowns effectively impounded reserves that could have otherwise been deployed in repo markets (see What is prev

34、enting banks from policing the repo market?, J. Younger et al., 10/31/19).That said, if reserves are only locally scarce among some key nodes in the payment system, presumably they could have been redistributed via some combination of Fed funds or other repo transactions. That would implicitly requi

35、re, however, that some banks increase their leverage, even if for a short time, to address a cash shortfall.This does not appear to have happened, in part because they are constrained by GSIB and other regulationsnot just on the most disorderly days, but through the gradualwidening in GC/IOER spread

36、s. There is in fact evidence that larger banks are facing headwinds that made it much more difficult to expand their balance sheets than a couple of years ago. For example, despite much better treatment in GSIB, rapid increase in sponsored repo has not translated into equivalent expansion of balance

37、 sheet (Exhibit 6). Rather, for the most part it has been used to transform existing leverage into a more regulation-friendlyformat.Exhibit 5: Reserves held by the largest banks declined this year despite stable to increasing demands on intraday liquidity from payments and securities settlementReser

38、ves held by the four largest banks (LHS) and intraday liquidity demands fromExhibit 6: Despite much better regulatory treatment, the rapid increase in sponsored repo has not translated into a commensurate expansion in overall balance sheet Total cash outlay (LHS;$bn) Excluding FICC (LHS;$bn) Netting

39、 efficiency (RHS;%)securities settlement* and Fedwire; both axes in $bn900100%Reserves held by top 4 banks (LHS)Securities settlement* (RHS) Fedwire (RHS)160140120100806040200Dec 14Dec15Dec 16Dec17Dec1880%60%40%20%0%1Q163Q161Q173Q171Q183Q181Q19Based on the combined actual maximum same-day payment ob

40、ligation in GSD, MBSD, and NSCC from quarterly IOSCO QuantitativeDisclosure. For details, see What is preventing banks from policing the repo market?, J. Younger et al., 10/31/19.Source: J.P. Morgan, FRB, DTCCWe include all names who file an FR-Y9C form, which includes domestic bank holding companie

41、sandthoseforeignbankingorganizationswithmorethan$50bninU.S.assetsand therefore organized as an intermediate holdingcompany. Estimated from MMF holdings of reverse repo exposures facing FICC.Note: Repo netting efficiency is estimated from disclosure of gross and net exposures from FR- Y9Cs, including

42、 bank holding and intermediate holding companies.Source: J.P. Morgan, SNL Financial, FR-Y9C, CranesThe Fed responded to the events of September with a strong display of force. Temporary open market operations (TOMOs) quickly expanded from overnight operations to term offerings and small value tests

43、for forward starting trades. Based on a comparison to MMF data and FR-Y9C forms, that would make the NYFRB frequently the largest single counterparty in U.S. dollar repo. This was combined with a $60bn per month T-Bill purchase program to provide more permanent reserves to the system. In total, this

44、 has increased the overall size of the balance sheet from a low of approximately $3.8tn to more than $4tn in just a fewweeks. That said, these liquidity injections flow through the primary dealers, and therefore do not address intermediation frictions. The largest of them are also GSIBs, which sugge

45、sts year-end will be a challenge (to say the least). As a result, spreads have remained under pressure for the most part even with the Fedintervention.Looking ahead to next year, we look for a few key themes to inform ourviews:More cash in the system, continued policy intervention, and the risk of s

46、upervisory relief leading to narrower funding spreads (GC/OIS,FRA/OIS) and wider swapspreadsISDA fallbacks are a narrower for long-end 3s/6s, while the Big Bang is a narrower for long-end FF/Libor and widerSOFR/FFConvexity hedging will remain important, particularly from banks and insurancecompanies

47、We have a short gamma bias, but note the potential for vols to outperform the skew in arallyVega supply will pick up a bit, driven by reinvestment demand for longer- dated structures, but will remain very slow compared to thepeakFunding and swap spreads: the turning of the tideIn short-term markets,

48、 the end of 2019 is shaping up to be a very bumpy ride. As we have highlighted in the past, a combination of factorsnot least among them the growth in derivatives and trading assets, trends in short-term wholesale funding, and the bank equity rallyhave pushed G-SIB surcharge scores higher through 3Q

49、. This suggests more ground to make up over the next few weeks relative to prior years. As discussed below we believe this will be felt most acutely in cross-currency basis markets, but repo (especially term GC) and swap spreads will likely similarly affected. Over the very near term, this should do

50、minate price action in these markets, and we expect balance sheet pressures to grow through the end of theyear.Though it certainly doesnt feel like it right now (see 3Q GSIB scores, H. St John et al., 11/22/19), we believe year-end pressures present a buying opportunity. In contrast to this year, mo

51、re abundant cash in the system via multiple channels is likely to be a central theme of funding markets in 2020. A larger Fed balance sheet is clearly a significant driver, and points to wider spreads, but it is not the only important factorin fact, longer run historical evidence suggests that even

52、large- scale asset purchases were a fairly weak driver of spreads, adjusted for other factors (Exhibit 7). Rather, the Fed T-Bill purchase and MBS reinvestment programs are part of a larger dynamic in which a fundamental shift in the supply/demand balance of fixed income markets should increase the

53、value of collateral via multiple channels. Further, we believe there is a material risk of more forceful policy intervention via multiple channels which could release more cash into the system without growing reserves, and perhaps most importantly reduce scarcity premium in term repo. All of this po

54、ints to narrower GC/OIS and FRA/OIS spreads, and wider swap spreads led by the frontend.We start with the supply outlook. Our colleagues in Treasuries estimate that despite a budget deficit, net issuance to the public is likely to decline noticeably next yearfrom more than $1.2tn in CY19 to roughly

55、$730bn in CY20 (see To a trillion and beyond, J. Barry et al., 11/12/19). Perhaps more importantly, we are likely to see the first year of negative net T-Bill supply since 2014. combination of less overall supply and negative net issuance of Bills should benefit secured funding market spreads in two

56、 ways: first by increasing the scarcity premium of T-Bills which should lead to some reallocation back into repo; second, by helping to alleviate the overhang of dealer inventories. We would also note that these estimates assume a terminal Fed balance sheet with around $1.5tn excess reserves, which

57、is somewhat lower than market consensus. Based on our Outlook Survey results, for example, more than half of our clients expect the Fed to target $1.8tn or higher (25% expect more than $2tn). Particularly if the terminal balance is larger than we expect, there is a risk that the Fed expands their pu

58、rchases to include shorter maturity coupon securities as well as T-Bills, which would be much more effective at alleviating the overhang from dealer inventories. In this sense, if anything the risks are skewed towards more rather than less aggressive intervention by the Fed in money markets than our

59、 current outlooka bullish bias for swapspreads.It is also important to note that demand for short-term fixed income is likely to continue increasing next year as well. As mentioned early in this publication, oneof the key drivers of funding markets in 2019 was substantial inflows into the MMF comple

60、x. We can show empirically that this was driven primarily by rising net yields relative to bank deposit ratesthe classic deposit beta effectand a flatter high-grade corporate yield curve (inverted in Treasuries), as well as a smaller contribution from higher levels of risk aversion (Exhibit 8). Look