Weekly Essay (Jan 15, 2017) – The January Fixed Income Rally:

For a few weeks now, I have mentioned the January fixed income rally that we have seen the past three years.  If you count this year, that would be four years in a row.  You can see from the chart on the right how strong this pattern has been.  We have averaged a surprisingly consistent 40bp drop in yield the previous three Januarys.  For comparison purposes, I adjusted the previous years’ rates on Jan 1 (and subsequent rates) to this year’s Jan 1 rate (2.45%).

I generally don’t have a strong view on seasonal patterns.  One would think that with efficient markets, there should be an adjustment (eventually).  What makes the January fixed income rallies a little suspicious is that in some of those years, the data was not particularly bullish.   CLICK TO READ THE REST OF THIS ARTICLE FROM THE CA WEB SITE

Next Week: I discuss the recent widening of the ED-FF spread.

Other Delayed Market Comments from the CA Newsletter:

From the Value on the Curve Section

  • Buy cheap crisis protection.  A combination of market short positioning, increased Trump headline risk, Article 50, possible downside risk on payrolls, and recent January seasonals could cause a large rally.

From the News Takeaways Section

  • I think most people (including me) gave Trump the patriotic benefit of the doubt after his win.  We support our President!  USA!  USA!  USA!  In a weird way, his relative silence the past few weeks has probably been helpful to the markets.  But what I found last week was that the more I heard Trump (and his posse) speak, the more nervous I started to become.  Did he really just start a tantrum fight with a news guy at his press conference?  And say nothing about his tax or infrastructure plan?  I hope Tillerson’s South China Sea comments were not serious and just more negotiating stance.  I’m not saying I’m moving to Canada.  Trump could end up being a decent President.  But don’t be surprised if others in the market also start getting nervous.  Make sure you have the Trump/cabinet stupidity tail covered.  The risk is real and the protection is cheap.
  • Last week, THREE FOMC members suggested unwinding the balance sheet.  Harker gave us a guidepost when he said “when we are at or above 100 basis points [two more hikes] – and we are moving toward that – I think it is time to start serious consideration of first stopping reinvestment and then over a period of time unwinding the balance sheet.”  Two more hikes should take us closer to the end of the year.  We need to keep in mind that he is on the hawkish side, so the FOMC core could be looking at later timing.  Rosengren said “My own criteria would be if we think the economy is strong enough that we are going to need multiple tightenings… at that time we should be seriously thinking about reducing the balance sheet.”  Rosengren and Harker are both in the “3 hikes in 2017” camp.  Bullard mentioned balance sheet reduction as a possibility, “adjustments to balance sheet policy might be viewed as a way to normalize Fed policy without putting exclusive emphasis on a higher policy rate path.”  Since he is only calling for 1 hike in 2017, he may be open to letting the balance sheet roll off in combination.  Keep in mind that these are Bank Presidents and not the core FOMC members, but it is notable to have several FOMC members talk about portfolio reinvestment.
  • Carney came out and said that hard Brexit is a problem for the EU, not the UK.  LOL.  Holy delusions Batman!  I am fairly certain that in a fraction of the two years it will take for Brexit to be negotiated, EU banks will be ecstatic to fill any void left from the UK banks.  In fact, it could lead to a recovery of EU bank profitability.  I am hoping Carney’s comment was some kind of ruse to try and get softer Brexit terms from the EU.  Otherwise, I’m going to have to start discounting some of Carney’s future comments, as he seems to be flip-flopping to Bullard proportions.  How do you go from Brexit causing “a technical recession” to “not a problem” in just 7 months?!?

Trade Summary from the Delayed CA Newsletter:

FLIP TRADE UPDATE: I discuss another bearish 6mo fly that looks too low, and a way to make it more directionally balanced.

OFFICIAL TRADE UPDATE: I added a “Type” column to the Trade List, to summarize some of the major characteristics of each trade (roll, crisis, bullish, neutral, bearish).  This should help clients looking to add a particular type of trade to their portfolio.

Forum Update:

The most recent posts from the Forum are:

I added another item to My Trading Philosophies thread:  Use the 90% of the time you are “free” to make yourself more productive in the future.  CLICK TO READ THE REST OF THE POST ON THE CA FORUM

A member posted a reply in the FX Forwards thread.  CLICK TO READ THE REST OF THE POST ON THE CA FORUM

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