Ahead of the Fed

Should be a quiet day ahead of the Fed's announcement at 2:15. Everything I've heard says the street is set up for a hawkish statement, so if Bernanke's gang disappoints, look for a bull steepener.

Corporate bonds continue to struggle to get a bid. My read in talking to dealers is that there is a deluge of fast money buying protection. Very little real money selling cash bonds. I've also heard a lot of corporate traders were getting "tapped on the shoulder." That's bond geek speak for when a dealer firm's management orders a trader to lighten his/her risk.

I had thought that any weakness in corporates would be held in check by eager buyers on weakness. On the other hand, it was widely believed that real money was weary of spreads being so tight for most of 2006. If that's true, it explains why PM's haven't been buying on weakness here. My bet is that corporate spreads creep in over the next 6 months or so. Even after the fast money sellers of credit get out of the way, it takes actual buyers to bring spreads in. But I stand by the theory that there is nothing fundamentally wrong with the corporate market, and the same liquidity technicals that caused spreads to be so tight are still there. Based on how the market is acting now, it may take time for enough buyers to express interest to really move spreads, but I believe it will happen.

How the corporate market will react today to either a hawkish or dovish Fed is hard to say. I'd like to say that the corporate basis is oversold, so the bias is for it to tighten regardless. I believe the street is relatively light on cash bonds, so that also is a positive technical. My best bet is we tighten on a dovish Fed, because that lowers the odds of a recession. Whether we widen on a hawkish Fed? Again, I'd like to say no because of the technicals, but this market is trading a little haywire, so I don't have a lot of confidence in that opinion.