Risk Assets Climb Ahead of FOMC Meeting

 

Risk assets have continued their “melt-up” this morning, continuing the positive momentum kicked off by Friday’s surprisingly upbeat jobs report. The S&P 500 and DJIA sit 0.81% and 1.21% higher on the day – bringing the S&P 500 within 5% of its pre-COVID all-time high. Swap rates and Treasury yields are modestly lower across the curve after jumping higher on Friday while the VIX or “Fear Index” has continued to decline- falling to its lowest levels since the coronavirus outbreak. 

 

 

FOMC two-day policy meeting to kickoff tomorrow. While the Fed is widely expected to hold benchmark borrowing rates in the 0%-0.25% target range, financial markets will be closely monitoring the forward guidance provided afterwards. More specifically, how the Fed plans to utilize its available tools to continue to stabilize interest rates, with the majority of Fed officials remaining resilient in their dismissal of negative interest rate policy (NIRP) as one such tool. Following Friday’s nonfarm payrolls beat and for the first time since early May, negative interest rates are no longer being reflected in Fed Funds futures pricing.  The concept of yield caps (pegging short-term Treasury yields at low levels) has been discussed as a way for the Fed to guide its asset-purchases, but yield caps haven’t been deployed since 1951 in the US and there exists heavy debate around how to exit the strategy without a large impact to the market.