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Don’t Kid Yourself. Interest Rates are Going Up.
Make no mistake. The shot has been fired across the bow, the chink has appeared in the armor, and the crack has opened up in the dike.
The Fed’s move to raise the discount rate on Thursday from 0.5% to 0.75% may have been technical, widely telegraphed by the Fed minutes, and an unwind of an artificial spike down in rates the economy no longer needs. Sure there was only $15 billion in loans outstanding at the Fed window, against $1 trillion in excess bank reserves.
But it was definitely an UP move for rates. The liquidity tide that has been floating all asset boats has reversed and is starting to recede. We’re about to find out who has been swimming without a swimming suit. The train is leaving the station.
Next week the TALF expires, eventually sucking another $1.5 trillion out of the system. The Fed is reverting from its role as the lender of first resort back to its traditional role as the lender of last resort. Inflationary expectations are going to rise.
While overnight rates are going to remain miniscule, probably for the rest of the year, the long end is going to take this less well. That means that one of the steepest yield curves in history is about to become a lot steeper. I’m thinking the face of Half Dome.
Now I know that I have been predicting that a short in 30 year Treasury bonds will be THE great trade of 2010. But don’t pop the champagne bottles just yet. Without more aggressive Fed action, the rise in long rates is unlikely to be a sudden, panicky spike.
So while you can comfortably sit with non leveraged short play like the TBF, you are going to have to nimbly trade the leveraged ones like a demon, such as the TBT, to keep the cost of carry from eating you alive. You are still sailing upwind against a 4.7% yield, and you can multiply that with leverage. Think of it more as a slow ground offensive, than a lightning fast aerial assault.
But it will grind us inevitably closer towards a major triggering event that will bring real fireworks, my favorite being a failed Treasury auction. If your spouse has a divorce lawyer pounding on your door unless you buy a house tomorrow, make sure you do so with a 30 year fixed rate mortgage. It will be the last time you see sub 5% mortgage rates in your lifetime. Better yet, dump the spouse.
For more iconoclastic and out of consensus analysis, you can always visit me at www.madhedgefundtrader.com , where the conventional wisdom is mercilessly flailed and tortured daily, or listen to me on Hedge Fund Radio at http://www.madhedgefundtrader.biz/ .
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I'm in, the strike is on.
Were you looking in the mirror when you typed that post?
No and look fwd to seeing everyone in DC.
Awake and wondering. What if the original american patriots were unwilling to be made an example of?
Perhaps the morally correct path is to stand,
against the wrongs done, therefore I am willing to go to jail, or die if neccessary.
We must each decide for ourselves at what point we no longer do business with the enemy. Wait to long and you become the enemy
Would love to see it. Would enjoy participating. It is clearly the morally correct path.
I don't see the majority of the US populous having the stomach, physical strength or endurance to raise a finger. They are counting on that and have for 50+ years.
I'm in on the strike and telling more people about it. Thanks for posting this.
Why not just by the house for cash as you would any other consumer durable, unless of course you still believe in the magic of credit LOL.
Plain vanilla mortgages are one of the few legitimate uses of 'consumer credit', which is of course why everyone and their doucebag brother started fancying them up to get a cut. While it's possible (and desirable) to by a house for cash, most members of what we once called the 'middle class' are busy making ends meet rather than saving up. When you get down to it, it makes little difference whether you pay 20 years of rent while you're saving or 30 years of interest while you live in a mortgaged house, you're still paying someone else for the right to have that roof over your head.
See Japan. We are entering deflation. I think being able to get a real rate of 4+% is going to be the trade of 2010. The global economy is going to find out that it's been swimming naked as stimulus gets paired back. The demand for Treasuries will be very strong once again. I'd figure what you think is going to happen will happen after 2011
Unless, of course, we have Fed intentionally crash the markets again...er..."deflation".
I dont hear anyone thinking outside of the box
Failed treasury auction? Uhhh..how many times has that happened since 1790? the answer starts with a z***.
Please, let's be sort of realistic.
Now how about the real world...say 10 year yields fall to 3% and the CPI goes negative, your real return is still pretty good. Beats the hell out of staying in equities where prices are historically due to fall another 50-75% so we can get back to paying realistic prices for earnings.
Preservation is the name of the game, methinks.
Oh and buy a little gold too
As a general rule I find it more useful to ignore the advice of this pundit. He's great at telling you how much he's made on a post already, but gives no entry and esit point. In fact he encourages you to enter oversld positions.
Lets take another scenario. interest rates go Up (discount rate) this drops the market and treasuries go UP. Or problems with the euro, muni market, or a host of other things waiting in the wings.
treasuries will go down if the discount rate does not rise. That I agree with.
Remember japan yields didn't go up either.
are treasuries a bubble, yes, but please don't imply in this market you knw when it's going to burst.
Tallk some trading, technical indicators, entry and exit positions and maybe I bother to listen. I was very surprised zero hedge lets you contribute.
If you want respect try looking at the post regarding the guy who wrote about commodity currencies. Now that's a trading post!!!