"No One Knows How To Interpret The Fed" Trader Reflects On Crushed Curve-Steepening Trade

Authored by Kevin Muir via The Macro Tourist blog,

Last week I got long the US 5-30 year yield spread (Air Says Get Long Steepeners). I thought the seasonality, combined with a bear move in bonds, would cause some steepening in that part of the curve.


Well, I got the bear move in bonds, but not only was there no steepening, the 5-30 spread flattened down to the previous lows of 92 bps!


What the heck is going on? The initial move down to 96 bps could almost be explained by the economic data of the time, and then the climb back up to 100 bps seemed encouraging, but the post FOMC collapse down to 92 bps was peculiar.

If Fed’s FOMC release was hawkish, I could understand the move. And to some extent, that was the first reaction. The US Dollar screamed higher, stocks initially sold off, and bonds got hammered. But if the Fed was so hawkish, the front end of the curve should have borne the brunt. You would logically expect the 2-year to rise the most. Yet the 2-year rose less than the 5’s.


It’s like the market decided the Fed would be tighter, further out in the future. Yet that’s not what the FOMC committee said, nor what Yellen communicated in the press briefing. In fact, there is a decent argument to make that the chances of a nearby tightening increased, but that the total amount of tightening for this cycle decreased.

Let’s have a look at the Fed’s infamous DOT plots which show the FOMC board’s expected interest rate path.


The entire expected interest rate path shifted down! And most importantly, the Fed lowered their terminal fund rate forecast. If anything, this development was dovish. Yet this interpretation is not getting a lot of airplay. Famed ex-Merrill Lynch strategist David Rosenberg is the only one I have seen actively pushing back against the idea that the Fed’s meeting was hawkish.


So why did the 5-year get hammered? If the market thought the Fed was tightening, then they should have wailed on the two’s. And more importantly, if the yield curve is flattening (indicating the Fed is tightening too quickly), why did stocks rip higher later in the day?

And yet if Rosenberg is correct that the Fed was actually much more dovish, shouldn’t that mean a relatively lower 2 and 5-year yield?

The truth of the matter is that the market doesn’t know how to interpret the Fed. Who knows how many of those governors will be there next year. And how much should we really trust the Fed’s forecasts? The reality is that they have proved time and time again that their words mean jack-squat.

In the meantime, the US 5 year note keeps leading the move to the downside. I am obviously wrong (I won’t insult you with “early”). I could handle being wrong if the whole curve was inverting, but it’s like I picked the absolutely weakest part of the curve to own.

I don’t know if this is just post-FOMC noise, or the market’s collective opinion about where Fed policy is headed. If I had to guess, I would say it is not nearly so well thought out. For whatever reason, there is a big 5-year seller, and that part of the curve is offered. Maybe it is all the new issue supply, or maybe some Central Bank out there is stuffed full of US 5’s and trying to pitch their position. For whatever reason, the market is flattening 5-30’s, and my trade has turned into quite the dud.

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Platinum-Palladium/Gold Ratio

Speaking of David Rosenberg, I am pretty sure he was the one who brought the platinum/gold ratio as an indicator for US 10 year yields to my attention, and today’s post jogged my memory enough to dig up the ole’ chart.


From 2009 to 2016, this indicator worked well as a proxy for US 10-year yields. But over the last year, it has failed.

But wait! Didn’t the whole platinum/palladium relationship get messed up with the recent diesel gate and increased popularization of electric vehicles?

Maybe we should change that ratio to palladium/gold. Intrigued, I created a new chart.


Nope, not really what I was looking for. Maybe the relationship is just broken, and whereas in the past the demand for platinum/palladium for catalytic converters (and other industrial uses) versus gold was a signal of economic activity, today it is not applicable.

Yet what if I took the combined average of the two “white” metals versus gold?


Hey, that’s better. Dare I say it, but I think I improved on David’s indicator. Someone let him know…

In the meantime, I now have another model that shows bonds are exactly where they should be. Gee, great…


LawsofPhysics Thu, 09/21/2017 - 18:09 Permalink

Oh for fuck's sake. The Fed is very easy to interpret.They issue "money" out of thin fucking air with NO REAL WORK and NO REAL RISK and they use it to buy OWNERSHIP of REAL ASSETS of ALL KINDS!!!!!"Full Faith and Credit"Let me be clear, roll the motherfucking guillotines!!!!!Not a damn thing changes otherwise.

knukles jcaz Thu, 09/21/2017 - 18:53 Permalink

This, kiddies, is called a bull flattener.Curve flattens with long rates falling.Why?Because with a tenuous economy, any tightening would bee seen as downward pressure on growth and inflation. Problem is, the average maturity of the Fed's portfolio is gonna make the runoff be a bit more lengthy that a simple reversing of funds from the systemDon't hold your breath, drink plenty of liquids and stay on the Ativan and Prilosec.  

In reply to by jcaz

new game jcaz Thu, 09/21/2017 - 18:59 Permalink

i'm waiting for the real loosers, the pensioners, wake the fuk up and understand the fed fuked them over directly with zirp. halved their returns. and i hope grandma realizing 1 percent returns are the result of these fuks called banksters gets out her double barrel and joins in with the 49ers for some real shit kicking of bankers...

In reply to by jcaz

lester1 Thu, 09/21/2017 - 18:24 Permalink

The Federal Reserve has went completely insane. They have a mandate to keep the stock market propped up and keep the dollar propped up for their wealthy Elite Masters. They are doing a lot of things behind the scenes covertly such as buying stocks using dark pools. What they are doing is basically propping up this zombie economy that died in 2008. They cannot do this forever and it is not going to end well. Globalization has failed. We need to go back to sound money balanced budgets and balanced trade. One of the only Economists that understand what's going on right now is Peter Schiff. 

ejmoosa lester1 Thu, 09/21/2017 - 18:32 Permalink

If the Fed truly wanted inflation, they'd raise rates.  There's so much coporate debt that needs to be serviced that prices would be forced up.Domino's Pizza, has gone from 10 to 231 since 2008.Yet they have a book value of -$57 a share.Total Debt of 2.8 billion.Earnings per year? $300 million.It would take ten years of every penny of profit to pay off that debt.Raise rates another 1% and you do not think Domino's is gonna have to raise prices? One Percent on 2.8 billion is 28 million, nearly 10 per cent of their current profits. And we are not even talking about reducing principle.Ironically, Value Line rates this stock above average.Go figure.

In reply to by lester1

jmack ejmoosa Thu, 09/21/2017 - 19:32 Permalink

They cant raise prices, thier competitors will mutilate them, then they will declare bankruptcy and restructure.  which won't help your inflation thesis, because that will only allow them to compete a lower prices.    they would get bought up by people like warren buffet just waiting to find some distressed assets they can purchase on the cheap.        If the reaction to higher rates is so severe that there is no longer any liquidity to buy distressed assets, they just go away, and the deflationary cycle gets started in earnest, aka depression.

In reply to by ejmoosa

thisisallnonsense jmack Thu, 09/21/2017 - 19:46 Permalink

*They would go out of business long before they could/would raise their prices*  The morons would probably increase ad spending before they pissed off fat ass joe the plumber.  The cesspool of retailers has trained the consumer to only buy stuff on sale.  Raising prices only increases the velocity of their bankruptcy

In reply to by jmack

Cluster_Frak Thu, 09/21/2017 - 18:34 Permalink

back in the good old school days1. Upward sloping yield curve = good2. flat = not so good3. downward sloping = bad It has worked then, it will work now. Let's not forget that Fed artifically held yields low by buying Treasuries. Lack of a major bidder for new treasury issues, should push yields higher across the curve (considering Fed was buying all maturities).I would not worry about the Fed, I would worry about the ECB. ECB is a major bidder for the Euro debt (let's not forget there is no federal debt, so ECB buys debt of countries at risk to align with the German bunds debt). If ECB buying stops, there might be no bidders for debt of certain countries. No bid = price collapse. Hence, ECB cannot stop quantitaitive printing. The Fed can, since USD is the currency of last resort and the only market that is able to absorb large sums of money. Let's not forget that only an idiot would leave serious money (over 250,000 or whatever the insurance leves are now) in a checking account overnight. Serious money parks in government debt. If anything we can see a shift to corporate debt, but treasuries are safe for now. ECB and Europe are fucked. Bye bye euro.

jmack ReturnOfDaMac Thu, 09/21/2017 - 19:43 Permalink

     The problem is, even the rubes know to buy the dip, so now everyone jumps on a small dip and we cant even get a modest 5% or 8% dip.  That complacency will eventually lead to over leverage and some "black swan" event which will probably be more like a black cat event will cause an 8% dip, the pain of which will cause margin calls that will lead to a 10% dip that will metastasize into a 20% dip which will cause the tide to drop enough to see the leprosy on a lot of corporate books and cause the 50% dip.    At which point the FED will start bailing and QE-ing again and we will continue the cycle for another decade or so with another 10 or 20 trillion packed on the ole balance sheet.

In reply to by ReturnOfDaMac

ReturnOfDaMac jmack Fri, 09/22/2017 - 13:24 Permalink

Yes, good points but if you do one of two things you will make out like a bandit:a) He who panics first panics BEST!b) Don't sell at all and ride it through.S&P went all the way down to 666 now its up over 2500 in just 8years. Over 400%!!!If its the end of the world, it makes no difference. But if it isn't, you're in fat city.  So I say, BTFD and get rich, or ride out till the end of the world.  This is like mogambo guru, it's easy!

In reply to by jmack

Robinhood Thu, 09/21/2017 - 19:38 Permalink

A wise man once introduced me to the meaning of MOPE.Management Of Perception Economics.To my simple mind this means that they will say one thing and do another.They might say they will reduce their balance sheet but all they will be doing is moving it from a transparant account to a proxy account.If you are wondering who the wise man is he is Jim Sinclair.

sinbad2 Thu, 09/21/2017 - 20:47 Permalink

Treasury rates are low, because the Fed prints and buys them.If the Fed stops buying, real investors will want a return commensurate with the risk.The US Government could not afford to pay the interest bill if the rates approached market price.So either the Fed continues to buy Treasuries, or the US defaults.

ds Thu, 09/21/2017 - 23:39 Permalink

The Fed cannot price global markets. The global real economies are priced by global markets. Global markets spin on their own orbits. Looking at global flows of goods and services to explain/predict prices in global markets is the voodoo of the Shamen. That most preys are in real economies do not mean that they matter to global markets. The Fed had been under captiviity by the Globalists and the mission is accomplished. The Fed is unchained together with all major CBs to support their own national economies because the Globalists are now confident that the major CBs will be more uncoordinated given their national focuses. Resources within national boundaries are priced by Global Markets. Preys are encouraged to dance to their nationalistic, cultural, etc ideals while they massacre each other based on race, language, religion, etc. You want to survive, you take whatever token (currency) chosen for you by the Globalists. Neither US, China , Russia etc can enforce a global currency.