Derivative Markets Signal Looming End Of The Business Cycle

While the last five weeks have seen $1.3 trillion of rate-hike bets have already been unwound - the most ever; the derivative market is signaling there is more pain to come as expectations for lower rates are everywhere.

Just another $1.9 trillion of rate-hike bets to unwind...


But as Bloomberg's Tanvir Sandhu notes, rates, skews, and inflation cross-currents suggest lower yields to come this summer...

USD short-dated skews on 10-year tenor remain deeply negative, with receivers trading at a premium to payers. As the chart below shows, the spread between USD 3m10y 25bp OTM payer vol and 25bp OTM receiver vol is still negative signaling expectations of lower rates...

Gamma implied vols remain near all-time lows and lack any expectation of a significant move.

Furthermore, the flatness of the Eurodollar curve has been increasingly pricing in the end of the business cycle...


U.S. 2y1m - a proxy for the Fed’s terminal rate - has crumbled to 1.75% along with breakeven rates, having required fiscal-policy expectations to play out to push neutral real rates (r*) away from zero or the term premium to move higher; it has been an unhealthy decline in rates with real rates higher and inflation expectations lower.

Upside for U.S. rates is limited over the summer and is unlikely to see a meaningful sell-off without concrete progress on fiscal reform.

U.S. 10-year yield has broken below the July 2016 trendline and 38.2% retracement from the low in the 2.13-2.15% area; a move to 100-DMA at 2.36% is optimistic, which has acted as a pivot in recent months.

Downside risk seeing extension to 1.96% over summer, in line with lower terminal rates...around 1.75%.


mkkby Sun, 06/18/2017 - 19:23 Permalink

Derivatives markets aren't magic 8 balls.  They don't predict shit.  Obviously with every market in jupiter land, it's all just specs making bets.Hey, I thought the world was gonna end the last jewish holiday... or was it last year's, or EVERY SINGLE FUCKING ONE before that...

Dr.Engineer Sun, 06/18/2017 - 20:10 Permalink

So, the bond market is saying the Fed has made a mistake. Now isn't that a surprise?  All I can say is "Look out below" as the stock market looks to book gains and hide in the bond market.Yep, even a silly stupid engineer said it first.

decentraliseds… (not verified) Sun, 06/18/2017 - 23:20 Permalink

 Why waste time on this alligator when the swamp’s most critical economic and political problems revolve around the hegemony of a global corporate cartel, which is headquartered in the US because this is where their dominant military force resides. The US Constitution is therefore the “kingpin” of an all-inclusive global financial empire. These fictitious entities now own the USA and command its military infrastructure by virtue of the Federal Reserve Corporation, regulatory capture, MSM propaganda, and congressional lobbying. The Founders had to fight a bloody Revolutionary War to win our right to incorporate as a nation – the USA. But then, for whatever reason, our Founders granted the greediest businessmen among them unrestricted corporate charters with enough potential capital & power to compete with the individual states, smaller sovereign nations, and eventually to buy out the USA itself. The only way The People can regain our sovereignty as a constitutional republic now is to severely curtail the privileges of any corporation doing business here. To remain sovereign we have to stop granting corporate charters to just any “suit” that comes along without fulfilling a defined social value in return. The "Divine Right Of Kings” should not apply to fictitious entities just because they are “Too Big To Fail”. We can't afford to privatize our Treasury to transnational banks anymore. Government must be held responsible only to the electorate, not fictitious entities; and banks must be held responsible to the government if we are ever to restore sanity, much less prosperity, to the world. It was a loophole in our Constitution that allowed corporate charters to be so easily obtained that a swamp of corruption inevitably flooded our entire economic system. It is a swamp that can't be drained at this point because the Constitution doesn’t provide a drain. This 28th amendment is intended to install that drain so Congress can pull the plug ASAP. As a matter of political practicality we must rely on the Article 5 option to do this, for which the electorate will need overwhelming consensus beforehand. Seriously; an Article 5 Constitutional Convention is rapidly becoming our only sensible option. This is what I think it will take to save the world; and nobody gets hurt: 28th Amendment: Corporations are not persons in any sense of the word and shall be granted only those rights and privileges that Congress deems necessary for the well-being of the People. Congress shall provide legislation defining the terms and conditions of corporate charters according to their purpose; which shall include, but are not limited to: 1, prohibitions against any corporation; a, owning another corporation; b, becoming economically indispensable or monopolistic; or c, otherwise distorting the general economy; 2, prohibitions against any form of interference in the affairs of; a, government, b, education, c, news media; or d, healthcare, and 3, provisions for; a, the auditing of standardized, current, and transparent account books; b, the establishment of state and municipal banking; and c, civil and criminal penalties to be suffered by corporate executives for violation of the terms of a corporate charter.