Yesterday we made a big stink over the Fed's reverse inquiry into the PD community over how much QE2 it should launch. Today, we find out what the distribution is: as Merrill's Harley Bassman points out: "Four dealers are predicting a $1+ Trillion buy program." It is good to finally know what the bogey is.
From Harley Bassman's note, just distributed to clients:
I was feeling just fine about the world today.....until I was handed a survey of dealer opinions about next week's QE2 event (aka the FOMC meeting).
Four dealers are predicting a $1+ Trillion buy program with a smattering of $900bn and $600bn votes tossed in. This would not have bothered me too much if not for the revelation today that the FED was asking dealer opinions.
This reminds me of how I tell my kids that our family is a democracy: They each have one vote.......and I have five !!! Why is the FED asking ??
They are supposed to already have the answer.
std px Nvol breakeven Terminal Breakeven Sep 28 Low
FVZ 1-00 97nv +/- 23½bp T5yr ~~ 1.01% to 1.48% 1.10%
TYZ 2-02 126nv +/- 27½bp T10y ~~ 2.39% to 2.94% 2.39%
USZ 4-00 131nv +/- 28½bp T30y ~~ 3.76% to 4.33% 3.66%
Considering the uncertainty, I would NOT call these options rich. Two points for at one month straddle on TYZ is a much better long than short.
Keep in mind this is a number most likely over a 6 month period. Double for full year impact.
At this point, if the Fed does something so stupid as demonstrating independence (whether from D.C. or the primary dealers), and does not announce $1 bn in QE2, well... welcome back gravity.