Fed to Raise Rates in 9 Months

EconMatters's picture

By EconMatters  


James Bullard Speech


The biggest news to come out of Friday`s financial market activity was James Bullard’s thoughts on when he expects the Fed to start raising rates, he believes the Fed will start raising rates sometime near the end of the first quarter of 2015.  


He also said, “While first-quarter GDP growth was weak, growth in coming quarters is still predicted to be robust,” according to slides for his speech. He added, “the average quarterly pace of growth in 2014 may still be an improvement relative to 2013.”


But the Fed may raise rates even sooner as we have thought that the market has become too complacent with regard to the Fed “talking down the market” which is at odds with the robust economic and inflation data of late, and the Fed will be forced to address the sharp rise in economic conditions of the second and third quarters “The FOMC would be ready and willing to get more aggressive if it was required,” including if inflation surged unexpectedly, he said. Another surging PPI report in the same direction fits this category in our opinion. 


The bond market is really asleep at the wheel right now in our opinion. With the recent surge in bond prices, right before a sea change that has been 6 years in waiting, the raising of the Fed funds rate is about to begin, and there are a whole bunch of folks on the wrong side of this trade, and all this money is going to have to come out of the bond market.



Market Squeezes Go Both Directions


Jeffrey Gundlach of Doubleline Capital has been talking up the notion of a bond market squeeze which of course would be good for his fund and his current positioning of the last six months, but squeezes work in both directions Jeffrey Gundlach, and there is far more money long the bond market right now than short, and yields are very depressed right before a sea change in terms of raising rates by the Fed.


All this long money has to come out with rising rates, I am sorry Gundlach but the real squeeze is going to be in the other direction after six years of a near zero Fed Funds Rate, rates are going to be raised and normalized, and according to James Bullard and Janet Yellen the fed will be targeting a normal short-term policy rate of 4 percent to 4.25 percent.


Six Years is not a Lifetime: Historical Interest Rates as Contextual History Lesson


The writing is on the wall, after six years of extremely loose monetary policy rates are going the other direction in the United States; and England is going to follow suit as their economy and inflation concerns have been on the rise as well, expect rate hikes likewise coming out of England in our opinion. 


Thus all this money came rushing into the bond market right before actual rates are going to be raised, talk about great timing and squeezes, over the next five years this is going to be one of the massive squeezes of all time, and in the short-term the 10-Year yield is going to blow past 3% faster than you can say December.



Remember those PPI, CPI and Employment reports are going to be hitting the Fed with an inflating and accelerating economic reality, and the Fed may be forced to act even sooner than 9 months with a couple more hot PPI and CPI reports like last week, and several more 250k plus Employments reports, it is going to get downright ugly in the bond market as all those longs of six years run for the exits under a normalized rate environment. 


Further Reading: May's Employment Report To Top 300K

The Levered up Yield Trade & The Unwind of Fund Flows


Accordingly, thanks Jeffrey Gundlach for being mindful of squeezes in the bond market, because we are right at the precipice of the biggest Short yield squeeze in the entire history of the bond market with the actual raising of interest rates by the Federal Reserve after six years of extraordinarily low short term rates in terms of monetary policy that created artificially low yields that are about to adjust much higher or normalize.


Just think the amount of money levered up to chase yield because there has been so much cheap low interest rate money to borrow, and leverage up the yield trade, artificially pushing yields even lower, all this money has to be unwound with the raising of short-term rates – this is the worst carry trade in the history of financial markets right before a sharp upturn in short-term interest rates and a massive re-pricing of the entire interest-rate market! 


Calculate the massive amount of funds, derivatives and hedges that now have to start unwinding in the other direction – talk about wrong-footed and mispriced markets! 


Investors currently looking at the wrong market for being a bubble: hint it`s not Google


Everybody has talked about the bubble in the bond markets for six years, but with each passing year and near zero percent interest rates, more complacency has sunk in with the status quo thinking that this low rate environment is the “new normal”. But this couldn`t be further from the case if we review what constitutes normal short term rates, and this complacency was reinforced and even perpetuated by the Federal Reserve itself with their dovish talk and actions of the past six years. 


Now that the interest rate environment is about to change, and everybody should be on their toes, all the bond participants are in a sleep induced coma, and asleep at the proverbial wheel, not being prepared for the shock of their investing lifetimes. Yes short-term interest rates are going to rise in the United States and England in anywhere from six to nine months’ time - and the entire investing community is poorly positioned, and on the wrong side of the market. The bond market bubble is about to burst folks!


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MeelionDollerBogus's picture

A temperature measurement will be taken outside one of the NSA spy satellites.

The difference from that reading & absolute zero will be added to the current interest rates.

Saltaire's picture

Seems the FED is in a tight spot and it's getting tighter. The FED works for the banks and the banks are happy with the no risk carry trade (nobody wants to borrow and they don't want to lend), however should the volatility in equities chase money into gold then the FED will act quickly to raise interest rates to pull money from gold and into bonds.


Fuh Querada's picture

Economics these days is dog shit shrink wrapped with an academic label stuck on it.

g'kar's picture

They must've figured all the retirees and savers would be bankrupt by then and wouldn't be able to take advantage of the rates. Damn beancounters.

nathan1234's picture

Ah Very Apt. ( 9 months of human pregnancy)

Of course in this case there will be a miscarriage and the plan aborted depending on events

And maybe next time they will announce an elephantine pregnancy of 22 months.

But by then, going by events that are likely to happen, the Fed won't be around, at least with it's present structure.


kurt's picture

Nine Months Just Enought Time

To Deliver the Anti-Christ

vmromk's picture

The author is an outright imbecile.

Fuh Querada's picture

There is more than a grain of truth in that statement.

nathan1234's picture

The real Imbiciles I know off are in the US Fed ( some just pass and and others present) and on Wall Street.


blindman's picture

the check is in the mail and they will not
come in your mouth.
No Judges ~ Kim Richey

Citizen Keynes's picture

The FED will raise rates?????

The MARKET will Raise Rates......

OC Sure's picture




Bonds do not appear to be in a short squeeze. The trend up since December 28th has been on expanding open interest in the nearby futures. This is genuine long interest. Short squeezes are measured by up trends with contracting open interest. Do you remember at about 2:30 am on December 23rd the SIX POINT 15 minute surge in the Bond?


 Were those trades ever busted? They took that spike of the charts. Now, THAT was the short squeeze.

The trend higher for the Bond will continue until it ends.


As for how you positon your participation per the fundamentals vs technicals, or opinions vs facts:

"The action of the market should be reason enough."  - Jesse Livermore


icanhasbailout's picture

Rates to rise nine months from nine months from nine months from nine months from now, give or take an arbitrary figure that is probably quite a bit larger than nine months.

Seize Mars's picture

The only way rates are going up is when there is a liquidity panic. They sure as hell aren't going to move due to Fed policy.

Urban Roman's picture

9 months from now: "Fed to raise rates in 6 months"; 6 months after that: "Fed to raise rates in 10 months"; two years from now: "Fed to rais rates in (random integer between 5 and 20) months".

How could it be any different?

Solarman's picture

Interest rates will not go up in the next ten years.

newbie vampire's picture

"Interest rates will not go up in the next ten years."

Yep, it ain't gonna happen.  The Elites have been feeding off free money from the Fed at the expense of the middle class.   Rising interest rates are not in their interests.   And Janet Free Money Yellen is the unlikest Fed Chairman, to EVER consider raising rates.


MeelionDollerBogus's picture

So even when the middle-class is completely gone and no one's left to rob, rates still won't go up? That's not far off in time, that event, you know that, right?