Inverted Yield Curve

By | July 1st, 2018|Featured, Positioning|

Some of the FOMC members have been saying they don’t want to invert the yield curve, but sections of the ED yield curve have already inverted.  For the past few weeks, EDH0-H1 spread through EDZ0-Z1 has been negative.  I think this will be a permanent feature of the yield curve going forward, barring some miraculous appearance of the term/risk premium.  There are a number of reasons for this: The Fed statement. The Fed took out the forward guidance that implied that they would stay accommodative.  In theory, as long as the Fed stays accommodative, the longer end of the curve [...]


By | June 24th, 2018|Economy|

Whenever I have a hard time with macro views because of news uncertainty, I like thinking about scenarios.  Most people think only about the current yield curve, but you can also look at the conditional yield curve - the yield curve implied by the options market.  You can use this conditional yield curve to structure trades such as: if ED6 is at price x by time a, then ED10 should be at y by time b.  Typically, a = b, but this is not necessary.  This may be the topic of a future CA.  For now, I just want to [...]

Surprising Central Banks and the Curve

By | June 17th, 2018|FOMC|

After a number of snoozer central bank meetings, we had several surprises from the Fed and ECB.  These surprises have caused a number of minor regime changes on how some local parts of the ED and ER curves should trade.  Here are some of the key things that will affect the yield curves going forward: The Fed removed forward guidance to remain for some time below longer term neutral rates. This was expected at a meeting later in the year, but it was a little surprising it occurred so soon.  The Fed was not going to hit “neutral” for a [...]

Fed Meeting Thoughts

By | June 10th, 2018|FOMC|

Next week’s Fed meeting could be important to gauge their thinking in the midst of various uncertainties – trade (tariffs) and the effect of the recent tax stimulus.  Here are some things I’ll be looking for from the Fed, and some trades I am considering implementing. The statement should be a snoozer, with a hawkish bias from the better economic data. I think a hawkish tilt will be the baseline expected from the markets in the economic conditions section.  I don’t expect a major change in the rest of the statement.  The reason is because of the uncertainties around trade [...]

Game Night and Wages

By | June 3rd, 2018|Economy|

Every now and then, we’ll have Game Night with some good friends of ours.  One friend works at one of the largest companies in the US, and the other works in a small multinational firm.  Usually we’ll have an hour or so to chew the fat before dinner and occasionally, I’ll ask them how the economy looks from their perspective. This time, I was really curious about wages, so I asked them about how salaries worked at their firms.  It’s been over a decade since I worked for a company, and I was very surprised at how wage increases were [...]

Fed Comprehension Fail

By | May 27th, 2018|Positioning|

I was amazed that FFV8 sold off as much as it did, but I am equally amazed that it rallied 8bps last week off of the Fed minutes.  I had been telling clients for weeks that the Fed Funds were too cheap – both from an additional-FFER-move perspective and a Fed hike probability perspective.  I gave reasons to think there were tail risks of the FFER coming in lower from what the markets were pricing in – including the Fed managing the FFER as it got closer to the upper end of the target range.  The Fed minutes did have [...]

Planet of the Apes

By | May 20th, 2018|Positioning|

You’ve heard me talk about Kong (the EDZ8-Z9 buyer) for most of the year.  I’m not sure if I’ve seen too many of the Planet of the Apes movies, but I seem to be seeing signs of large market participants all over the place. I was telling some people that I thought I was strange that tens broke the key 3.05% rate and we didn’t take off.  It will be interesting to see what happens the next week or two before the next wave of key data. There are clearly large players in the market that have the size to [...]

Backing Out Fed Funds

By | May 13th, 2018|FOMC|

Have you ever seen that online ad, where they show you a bunch of fruit in a series of math problems, and you have to figure out what the value of each fruit is?  That’s exactly what I thought of when I looked at the Fed Fund futures.  The market price of the FF future would be the numbers on the right and you have to figure out what the factors being priced are (the fruit).  You use the values of the fruit from one level to work on the next. I had been trying to figure out why some [...]

Some Clarity

By | May 6th, 2018|Economy|

The outlook for the economy and Fed policy had been a little murky the past few weeks.  A number of things are starting to become clearer, from the Fed, data and news last week: The bar for the Fed being spooked by inflation is higher. The Fed went out of their way to put in “symmetric” TWICE in the FOMC statement.  This also makes an overshoot less likely.  Several Fed members (in particular Dudley and Williams) have come out and said that they are comfortable with inflation being somewhat higher than their 2% target.  I think the symmetric discussion probably [...]

The Next 25bps in US Tens

By | April 29th, 2018|Economy|

I was talking to someone at a dinner party and they asked me what I thought of yields, now that we went over 3% in tens last week.  For someone who looks at the yield curve all day, I have no strong conviction on direction.  Whenever this happens, I like listing all the arguments down and seeing which side makes more sense. THE BEARISH CASE We have strong global growth… more or less. The European data has faltered some, but there is no strong reason to think the growth couldn’t just keep chugging along at 2-2.5%, as it has for [...]