Trading The Fed
It’s easy to criticize the Fed. They’re plenty of folk out there shouting from the cheap seats. Better to translate 1) what we know to be policy error, and 2) the confusion which we predicted would go with the new policy of transparency, to the bottom line.
When Bernanke first announced that FF’s would remain at rock bottom into 2014, we knew that near term real-sector events would not cooperate (payroll, consumer and manuf activity). This was the result. The simplest of strategies was to own (L–S) the Eurodollar strip. Since the Fed is god to the market crowd, the strip converted Bernanke’s policy to economic reality. Thus, we recommended to clients on Feb/16 to own Sep/12–Sep/13, then -13. Target of -25 was printed Mar/14 and we recommended an exit.
We also applied this insight to the US term structure, recommending Mar/9 that clients own (L-S) that spread, 2-30 then +284. That worked satisfactorily and an exit was recommended Mar/20, +308.
Given the last, less-than-buoyant Payroll print, and, E-Z problems, these spreads have come in, last -10 on our sample Euro spread, and +287, 2-30. From this point, course-of-least resistance for longer Euro rates is higher (or more inverted prices). Look to own (L-S) the strip again, given a window, or perhaps the Treasury curve. This is because economic reality ahead will not cooperate with the present market view for a repeat of the past two years, for a Spring faltering. It won’t happen. This is true even considering today’s disappointing Mar Durables print. And another “twist” is not in the cards.
A window may present itself today when Bernanke repeats the FF’s will remain near zero into late 2014. But key is not to rush on any of this, only to harvest at the margin.
Robert Craven
It’s easy to criticize the Fed. They’re plenty of folk out there shouting from the cheap seats. Better to translate 1) what we know to be policy error, and 2) the confusion which we predicted would go with the new policy of transparency, to the bottom line.
When Bernanke first announced that FF’s would remain at rock bottom into 2014, we knew that near term real-sector events would not cooperate (payroll, consumer and manuf activity). This was the result. The simplest of strategies was to own (L–S) the Eurodollar strip. Since the Fed is god to the market crowd, the strip converted Bernanke’s policy to economic reality. Thus, we recommended to clients on Feb/16 to own Sep/12–Sep/13, then -13. Target of -25 was printed Mar/14 and we recommended an exit.
We also applied this insight to the US term structure, recommending Mar/9 that clients own (L-S) that spread, 2-30 then +284. That worked satisfactorily and an exit was recommended Mar/20, +308.
Given the last, less-than-buoyant Payroll print, and, E-Z problems, these spreads have come in, last -10 on our sample Euro spread, and +287, 2-30. From this point, course-of-least resistance for longer Euro rates is higher (or more inverted prices). Look to own (L-S) the strip again, given a window, or perhaps the Treasury curve. This is because economic reality ahead will not cooperate with the present market view for a repeat of the past two years, for a Spring faltering. It won’t happen. This is true even considering today’s disappointing Mar Durables print. And another “twist” is not in the cards.
A window may present itself today when Bernanke repeats the FF’s will remain near zero into late 2014. But key is not to rush on any of this, only to harvest at the margin.
Robert Craven
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