Category Archives: Interest Rates

Interest Rate Futures at Odds with Federal Reserve

There’s a saying that’s been around a looong time in the domestic interest rate and stock markets. Although it was once nearly forgotten, it’s come back with a vengeance since the 2009 collapse. DON’T FIGHT THE FED. Ring a bell? The Federal Reserve Board (FRB) here in the US has been the leader in extricating the world’s economy from the depths of despair. Their policies, whether right or wrong, have put us on the leading edge of the global economic landscape. Two things have happened as a result of this. First, the US now finds itself dragging along the global economy because the FRB’s practices have placed the US ahead of the global recovery curve. Secondly, because we’re now ahead of the global recovery curve, the first rate hike in years is being taken for granted as global pressure suggests the FRB may have acted too soon. The reality of this is the trade setup in the interest rate complex as shown below.

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Bond Spreads Will Set Year’s Tone

Our theme continues, the Treasury Bond market spreads will set the tone for 2016. We wrote here at Equities.com on January 5th that, “US Bond Little Changed in Spite of Chaos.” The chaos has certainly continued with the S&P 500 off nearly 5% since then and China’s issues are anything but settled. It’s not very often that the workings of the global economy can be examined in real-time through the lens of a daily chart. We think the congestion in the U.S. interest rate markets is providing us with this rare opportunity as we speak and that its forecasting abilities could set the tone for the rest of the year.

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US Bonds Little Changed in Spite of Chaos

The Federal Reserve has hiked interest rates for the first time in years, China is falling apart and tensions continue to grow between Saudi Arabia and Iran. The combined chaos these events have generated have moved the 30-Year Treasury Bond futures less than one handle over the last year. In fact, the converted yield on the 30-year Treasury Bond futures has risen .0726% over the last calendar year. Therefore, in spite of the noise in the markets, the reality is that not much has changed.

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Ten Year Treasury Notes at Critical Juncture

The current interest rate scenario has been by far the loudest nothing I’ve heard since Greece was about to collapse. The confounding factors have sent us back through 45 years of Federal Open Market Committee (FOMC) decisions line by line. This was tedious, to the say the least, relevant at its best. Aside from FOMC data perusals and the hopeful nuggets of useful information, price and time appear to be doing their best to draw our attention back to where the rubber actually meets the road. That being said, we’ve reached a critical point in price and time that should yield big clues in the future direction of interest rates.

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Interest Rate Futures Appear Set for Rare Occurrence

The interest rate sector has been going crazy trying to determine what to do since the Federal Reserve Board (FRB) chose not to raise rates at the September meeting. My email has been inundated by interest rate related mailings. The basic point of most them was, “Now that the Fed held steady, what corner have they backed themselves into?” Most of the boxing in is focused on the FRB’s historical actions. I went back through 45 years of data to determine the scarcity of an October or, December rate hike along with Presidential election cycle analysis which isn’t supposed to be linked to the FRB in any way, shape or, form (wink.) We’ll also move through the individual futures charts to determine what the big money is suggesting with respect to FRB action, history be damned.

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Eurodollar Position Ahead of the FOMC

There are major macroeconomic events taking place at this point in time. The Chinese stock market collapse and Yuan currency re-balancing, the collapse in oil prices, Greek default, Japanese inflation, etc. The recent softness in the global equity markets, especially, China’s has led many to believe that Chinese growth may not be what we thought it was. This has dealt a serious blow to global GDP forecasts as the Chinese economy has been charged with the task of staving off global deflation. These recent events are undermining the market’s faith in the Federal Open Market Committee’s ability to raise interest rates, even nominally at the upcoming September 17th meeting. This confluence of uncertainty has driven the short end of the yield curve down as investors have sought liquidity and safety.

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