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.
So you’ve heard that LIBOR is going away, due to be replaced by SOFR? Well, if you’re not a regular user of interest rate swaps & swaptions (which, unless you’re an institutional-level client, is probably true), then what you really care about is how this impacts the thing you can most readily trade: Eurodollar futures. Here’s how Eurodollars are going to work after LIBOR.
Thanks to policy-induced crowding-in of Treasuries, the front-end of the curve is now doing exactly what the Fed feared the most. A nightmare scenario of cutting rates… and nobody caring. Positive historical skew has made them a popular diversifying asset for the momentum crowd – and that’s exactly why we should be concerned.
As August comes to a close, one can’t help but wonder just how dependent risk assets have become on everything from tweets to rebalancing. The biggest form of life-support comes from the Fed: equities are in a world of total dependency.
The Fed now spends over 1/3 of its time talking about financial markets in the minutes. That’s more than trade, monetary policy & employment combined. This unhealthy obsession is a distraction – and it’s guiding the market in a dangerous direction.