Friday’s position shift across the front-end of the interest rates curve was the single largest swing in the last 6 months by a multiple of 2.5x, bearing tell-tale signs of new shorts. As the prospect of a trade truce drove giddy selling at the lows – with most of the volume going thru prior to the Fed’s midday announcement – there was ample room for a counter-trend move, a staple of the 2019 trading diet. The subsequent reaction in the afternoon & again this morning (the latter being triggered by the inevitable negative trade headline we all have come to expect as the new normal) is nothing more than a brutal punishment of that behavioral bias most innate in all of us.
If it looks like a duck and it quacks like a duck… well, it doesn’t really matter what the Fed says – it’s probably gonna trade darn like a duck, too.
From repos to POMOs & from LSAPs to QE, here’s what every trader needs to know.
The fate of LIBOR is likely to precipitate one of the largest one-off structural changes to the interest rates market in our lifetimes. Regulators are growing increasingly concerned because we’re ill-prepared for what comes next. Thus, more ad lib experimentation by policymakers.
It’s a tectonic shift in a $400 trillion+ market.
We’re not supposed to be talking about chaos in $ funding markets in the same breath as the wreckage occasionally wrought in emerging markets. We’re definitely not supposed to be saying “the collapse in the Argentine Peso was barely 1/3 of what we just saw in the market that the Fed controls…” Yet here we are. Again.
I tend to think about coverage of “Liquidity and the Funding Market” in the same way as “Child Stars of the 90s and the Eurotrash Nightclub Scene”. If they’re making headlines these days, it’s not because things are going well for Liquidity; it’s because they’ve been discovered face-down in a miasmic pool of ever-deepening turpitude & even their best friends are starting to get really, REALLY worried…
The interest rates market is recovering lost ground from last wk’s smoking carnage on the back of a monster move in the oil market over the weekend. It’s important to understand why this matters for rates, especially given current conditions in the bond market.