27 March 2015 US Fixed Income Weekly No directional cue emerged after the FOMC. It is effectively a distributional modification, a swelling of the tails. The probabilities of rates going both higher and lower have increased, at the expense of the likelihood of staying in the range. The novelty of the last FOMC meeting is the mechanism whereby Fed consensus is converted into market dissensus. Fed language became a pure volatility effect. With tails probability higher, confidence regarding a particular directional position is undermined - it is now subject to quick revisions at the slightest market move. Thus any residual overweight in assets for which valuation has been distorted by stimulus is likely to come under scrutiny and possibly be corrected. That should free some maneuvering space for the Fed and make potential hikes less damaging. As far as an attempt to return vol to the markets, this is mission accomplished. Withdrawal of stimulus, if not carefully executed, has potential to expose the underlying negative convexity of the market created by the monetary policy itself. This can be seen from two complementary angles. Implicit belief in the Fed as a global market stabilizer has made both credit and equities behave like a positively convex asset. Whether the economy was improving or not, there was always stimulus as an alternative support in case economic data disappoints. As a consequence, both asset classes developed additional desirability due to embedded optionality. In that sense, unwind of stimulus is a withdrawal of "free" optimality of risk assets - and vice versa, delayed exit is an extension. Risk of stimulus unwind is all about the speed of events. The mechanics of this can be understood by visualizing its actual realization. In less liquid markets, like credit, this is especially easy to see. If unwind is too fast, the street would not have time to flatten its position in the interdealer market and therefore would be unab