Tag 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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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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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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Interest Rate Futures – Confounded

There’s been no shortage of talk surrounding the interest rate complex. I believe the recent Federal Reserve Board’s meeting was the most highly anticipated since the economic collapse. Their decision to leave rates unchanged sent everyone back to their drawing boards. I’ve read tons analysis since then by people who really know the inner workings of the Fed, the economy and the interest rate markets. The general consensus among these people is as clear as mud. When the brightest of minds come down on opposite sides of an argument it leaves us mere mortals incapacitated in a head shaking way. Since we can’t count on the experts, we’ll go straight to the source, the markets themselves.

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A Proactive Approach to Chinese Developments

Obviously, China has dominated the news this week. There has been rampant speculation regarding the, “first roach” philosophy which suggests there’s much more to come in the way of Chinese Yuan/Renmimbi devaluation. I’m not very good at projecting political developments along an investment front. However, I do know enough to hunt down the information no one is talking about amid the hyperbole. What follows are a few actionable ideas based on the historical context of recent US economic developments and the transference of these principles to the Chinese economy’s cyclicality.

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Hedging Interest Rate Risk with Eurodollar Futures

It is time to look at alternative ways to hedge against rising interest rates. Unfortunately, with the huge increase in volatility due to so many headline issues from Greece to trading halts on the NYSE, that it makes it tough to hold onto positions. Fortunately, the most liquid interest rate market is structured in such a way that hedging against inflation can be done with a reasonably fixed amount of risk.

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What Inflation?

The recent bond market sell off came on the heels of Bill Gross’ comments regarding the German 10-year Bund as, “The short of a lifetime.” We had already noted the negative yield situation in mid-
March along with the increasingly negative tone that commercial traders were taking. Positioned accordingly, the bond sell off was a profitable experience. Over the last two weeks, however, there has been more and more talk about inflation and frankly, I just don’t see it coming. Therefore, the generational bond rally may not have come to the screeching halt that the media is leading us to believe.

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