Global Rates: Trick or Treating with Central Banks
The desk highlights the ongoing volatility in the derivatives markets driven by central bank actions, particularly as we approach key policy decisions. Per the full note source, Ipek Ozil and Khagendra Gupta emphasize that market participants are grappling with the implications of recent rate hikes and the potential for further adjustments. The commentary suggests that traders should brace for continued fluctuations as central banks navigate inflationary pressures and economic growth. With no immediate high-impact events on the calendar, the focus remains on the evolving central bank landscape and its influence on market positioning.
What the desk is arguing
J.P. Morgan's Ipek Ozil and Khagendra Gupta discuss the recent and upcoming central bank developments and their impact on derivatives markets. The podcast, recorded on 31 October 2025, implies a focus on rate path uncertainty and derivative positioning as key themes.
Where it sits in our coverage
We have no internal coverage on the specific currencies mentioned (none), so we cannot provide a consensus or firm spread.
How other firms see it
No other firms are cited in the source commentary.
Key takeaways
- 01Central bank developments remain a key driver for derivatives markets.
- 02Podcast recorded on Halloween, suggesting a cautious or 'trick-or-treat' outlook.
- 03Focus on US and European interest rate derivatives strategies.
Market implications
The commentary may reinforce expectations of volatility in rates derivatives as central banks navigate monetary policy decisions. Traders should monitor upcoming central bank meetings and adjust positions accordingly.
Risks to this view
Unexpected central bank actions, such as rate hikes or pauses, could disrupt current market pricing. Data dependency remains high, and geopolitical risks may complicate the outlook.
Hello, and welcome to At Any Rate, J.P. Morgan's global research podcast, where we take a look at some of the drivers behind the biggest trends and themes across fixed income, currency and commodity markets. I'm Ipeka Ozil, head of U.S. interest rate derivative strategy at J.P.
Morgan, and today I am joined by my colleague, Kagan Ragupta, head of European interest rate derivative strategy. We are recording this on October 31st, and our comments today are based on our published research available on J.P. Morgan markets.
So Kagan, thanks for doing this Halloween special podcast with me today. And I'm going to do my best to keep Halloween related puns to a minimum. And of course, that's with the exception of the title of our podcast, which is trick or treating with central banks.
So you know, we had the FOMC, BOJ, BOC and ECB meetings this week. So it was a very central bank heavy week. And next week, we have the Riksbank, BOE and the Nordiskbank meetings.
And of course, these meetings will have or have already had implications on our markets. Hi Ipek. Yeah, you know, I'm also looking forward to this Halloween special and hope that our comments don't really spook our listeners.
Now, of course, amongst all these central bank meetings, the FOMC was quite a cracker, or maybe, you know, I should say quite a pumpkin. I think we're already doing pretty well with the puns. Okay, so maybe I'll get started with the FOMC and then we can go from there.
So the FOMC cut the funds rate by 25 basis points and announced an end to its balance sheet runoff or, you know, quantitative tightening effective December 1st. And none of this was all that surprising. So our economists and the markets were pretty much expecting a 25 basis point cut in this meeting.
And we had revised our QT timeline and we were expecting QT to conclude at the end of this month. So what was surprising was actually the dissents, right? There were two dissents this time around, one for a larger cut and actually one for keeping the policy rates on hold.
And additionally, four reserve banks submitted requests for no change in the discount rate, which could indicate that, you know, there were already some second thoughts about cutting rates when core inflation is still close to 3%. Actually Dallas Fed President Laura Logan just said this morning that she was, she didn't want to cut rates given high inflation. And you know, additionally, there were no changes to the administry rates or to SRF or there was no mention of starting temporary open market operations.
I will say that what was also surprising or rather what really moved the markets on Wednesday was actually Chair Powell's comments in the press conference. To quote him exactly, he said, in the committee's discussions at this meeting, there were strongly differing views about how to proceed in December. A further reduction in the policy rate at the December meeting is not a foregone conclusion, far from it.
And you know, markets reacted to this as they took out some of the easing that was priced in and yields increased. Yeah, I know, I see the market reaction was quite strong, following Chair Powell's comments. As our economists noted, by Powell's standard, these were unusually blunt remarks.
And he was asked on this multiple times. There was also some movement in swap spreads following the FOMC, right? Yeah, that's right.
Especially at 2pm, a sharp narrowing of swap spread started and 30-year swap spreads narrowed by as much as two basis points before recovering some of the narrowing. And if we take a step back and look at swap spreads over the past month, we can see that they are significantly wider, especially in the long end. And we think this was driven by a confluence of factors from Dallas Fed President Logan's speech last month on changing the benchmark rate from Fed funds to TGCR, to Treasury debt management expectations to QT expectations.
And we had been arguing that the widening in the long end was likely overdone. And the FOMC meeting this week likely disappointed on two fronts, right? There was no discussion of changing the benchmark rates.
There were no adjustments to administrative rates. And QT is ending, but probably not as early as what the market participants had anticipated. So all that being said, swap spreads narrowed, which made sense to us.
And looking ahead, a similar narrowing could occur following the new funding announcement next week, which is another headwind to swap spreads. I should say, though, Logan gave a speech this morning as well, where she talked about some of these concepts and swap spreads are reacting again and they're widening. So we will see how things proceed from here.
Kagenra, maybe let me turn it to you and let's switch to the other side of the Atlantic. Should we start with ECB since that meeting happened yesterday? ECB kept rates on hold at 2% and left forward guidance unchanged, remaining set on a meeting by meeting, data dependent approach.
And overall, it seemed to signal that ECB remains comfortably on hold for now. What were your takeaways and how does it impact how you view derivatives markets? You know, unlike the FOMC, the ECB meeting was broadly a non-event.
No fireworks, no tricks, no treats. ECB is now in a good place and we see the bar for them to move from this to be rather high, especially, I mean, both cutting and hiking. I still think that risks are biased for them to cut rates, but that is unlikely to materialize until we see data disappointment and more importantly, inflation starting to understood target, which if our forecast is right, it would start sometimes early next year.
Until then, it's a steady ship. Commensurately, we expect front-end yields to remain in a narrow range and that supports, in my view, tactical trading. As I said earlier, risk-reward supports lower yield, but we refrain from outright long-duration exposure in euro area, given recent strong correlation to SOFR yields and more importantly, lack of catalyst here for yields to move on its own.
We do prefer expressing our bullish views via call spreads, for example. Now the upside to this PERMA hold stance is that volatility has come down for European rates significantly. We see room for modest further decline in implieds as the distribution of rates remains squeezed, but still like short gamma positions on expected low delivered volatility.
Just to highlight that, you know, one month delivered vol for two-year and five-year swaps in euro area is now approaching the levels seen before the start of the hiking cycle, which is like very, very low. I think delivered is going to stay low as over the next few days, there is lack of macro data to move the needle in either direction. Finally, with yields staying in a range, one can boost, also boost returns by infrequent delta hedging.
So overall, ECB is in a good place and that is essentially a volatility damper in my view. Thanks Kaganra. That makes sense.
And maybe let's wrap up with what we're expecting for next week. We have BOE, Riksbank and Nordisk Bank next week, right? So what's the view going into those meetings?
We're expecting no change from either of these central banks, honestly, next week. The decision for Riksbank and Nordisk Bank should be straightforward in my view. These are non-forecast meetings for the Scandi banks.
Their forward guidance has been to stay on hold for now and macro data and market pricing is exerting no pressure on them to do anything otherwise. So a strong on hold with similar forward guidance from the Scandinavian banks. We think that the easing cycle for these two central banks is now over and then they will stay on firm hold.
The Bank of England will publish new set of forecasts next week. While labor market has been gradually weakening, the large inflation missed last week has market participants excited and we are pricing around, give or take, 25% probability of a cut next week. I think the central bank is unlikely to react to one data point.
They would probably wait for a one or two more inflation prints to ensure that the decline last month was not a trick. Also we have the budget on 26th November and the central bank may want to wait for that before deciding further policy action. The data is definitely not pushing them as inflation is still at 3.8% even though that was a downside surprise versus expectations and of course well above the target.
So they can afford to wait. We have them going again next year in February and May before pausing at 3.50 after that. However, I do mention that the risk of them going in December is rather elevated but that depends on the data between now and then.
Got it. And again, Red, thanks for joining me for this podcast today. I think it's safe to say that you win on the Halloween puns today.
That's all from us today. Thank you for listening. And if you're celebrating Halloween, hope you get to enjoy some candy.
Stay tuned for more updates on the fixed income space here at AnyRate, JPMorgan's global research podcast series. This communication is provided for information purposes only. Please read the JPMorgan research reports related to its content for more information including important disclosures, copyright 2025, JPMorgan Chase & Company, all rights reserved.
This episode was recorded on October 31st, 2025.
Sources & References
How we cover this story