Bond Traders Uncover Secret to Rates That Fed Just Does Not Get
Comment of the Day

May 26 2015

Commentary by Eoin Treacy

Bond Traders Uncover Secret to Rates That Fed Just Does Not Get

This article by Daniel Kruger for Bloomberg may be of interest to subscribers. Here is a section: 

That pessimism has been reflected in yields on the 10-year note, which are still well below their most recent peak of 3.05 percent last year. They were at 2.18 percent as of 6:30 a.m. in New York on Tuesday, according to Bloomberg Bond Trader data.

“The Fed has opinions; the market has positions,” said Jack McIntyre, who helps oversee $45 billion at Brandywine Global Investment Management in Philadelphia. “If the data doesn’t show marked improvement soon, they’re going to get pushed back into 2016.”

?Fed Chair Janet Yellen said Friday she still expects to raise rates this year if the economy meets her forecasts, with a gradual pace of tightening to follow.

Eoin Treacy's view

Everyone seems to be talking about when the Fed’s first rate hike will be. However I don’t think this is the most relevant question. The bigger question is when the Fed’s second rate hike will be. The economy is doing a bit better and wages are beginning to rise. One the other hand the disinflationary pressure of lower commodity prices and the stronger Dollar has so far stayed the Fed’s hand. 

The Fed will need to begin to remove monetary accommodation if it wishes to avoid inflating an asset price bubble. This might be the deciding factor in whether they decide to raise rates in September or not. Following the first hike they will then probably wait and see what effect it has on asset prices. It could be a while before they raise rates again and it is reasonable to assume the pace of the advance will be slower than what we saw from 2003 onwards. 

10-year yields have pulled back to the region of the 200-day MA and will need to find support above 1.75% if potential for additional higher to lateral ranging is to be given the benefit of the doubt. 

The S&P500 has lost momentum over the nine months since the Fed stopped its QE program. The progression of higher reaction lows remains intact and it has just failed to hold last week’s move to new highs. A retest of the region of the 200-day MA now looks likely but a sustained move below 2040 would be required to begin to question the consistency of the medium-term uptrend. 

The Dow Transports Index is the weakest of the main US stock market indices. It is being led lower by airline shares as the prospect of a price war increases. A sustained move above 8650 would be required to question current scope for additional weakness. 

JetBlue Airways posted a downside weekly key reversal last week and is now following through. A clear countermanding upward dynamic would be required to question current scope for a further test of underlying trading. 


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