Some Thoughts on Post FOMC Trade

October 30th, 2013 9:40 pm | by John Jansen |

When I first began in the bond business I remember a seasoned veteran explaining to me that the key to understanding short term gyrations in the market is dealer positions. The over arching responsibility of the dealer community is to get positions back to flat. So longs always get liquidated at some point and shorts always cover.

Against that backdrop, (and employing hindsight which is always perfect) the post FOMC back up in rates is quite understandable. The market was sitting at multi month low yields (in the belly) as the statement hit the tape. (Yes, there once was a tape and before important events a bell would ring to let the room know that something important would print momentarily.) The market had failed three times to breach a Fibonacci level at 2.47 on 10s and dealers were long following the monthly 2 year/5 year/7 year tsunami. Market participants anticipated a dovish statement from the FOMC and received a non hawkish but slightly less dovish release. At that point longs with sweaty palms pulled the trigger and liquidated positions and prices dropped.Prior to the FOMC statement the belly had been “en fuego” with 5s 30s at 235 basis points and 10s 30s at 113 basis points. As I write this piece 5s 30s is 232.8 basis points and 10s 30s is 110.6 basis points.

The objectionable portion of the statement was something which the assembled solons deleted. In the previous statement they expressed concern about tighter financial conditions which resulted from the increase in rates over the spring and summer and the potential for that to have a dampening impact on economic activity. Apparently they are unconcerned currently because 10 year Treasury rates have dropped 50 basis points from the 3.00 percent peak attained in September. What I find strange about the FOMC logic is that they were the proximate cause of the rate rise and the subsequent decline in rates. So they are trapped forever in an infinite loop of  their own making. That would seem to be a real problem because they can not buy $85 billion of securities monthly ad infinitum.

I think that they will forever rue the September non taper decision. The economic crisis which deserved extraordinary measures has long passed. We have muddled along but those extraordinary measures are no longer necessary as we have stepped back quite a bit from the abyss. The Federal Reserve, the credit markets and the world economy would have been better served if they had announced last month that they were set to cut purchases by $5billion each month until they are at zero. They should have put the market on notice that the methadone treatment was over and that they would only intervene again in the event of a real emergency. The Fed is in a box and when they decide to extricate themselves they will leave a trail of tears.

Be Sociable, Share!
  1. 2 Responses to “Some Thoughts on Post FOMC Trade”

  2. By Ozvaldo on Oct 31, 2013 | Reply

    Very true last paragraph.
    The Bernanke Fed has always seemed to be a weak poker player; they seem to get easily rattled and lose their resolve. In contrast, recall the Rubin currency interventions in the 90s. Say what you will about Rubin, but he was a good trader and knew how to play with size.
    Obviously the two situations and roles are unfair to compare for many reasons but still one can tell who was the trader at heart and who was the academic.

  3. By JK on Nov 5, 2013 | Reply

    That first paragraph is particularly useful for anyone watching the bonds markets. Seriously, it can not be understated how important it is to be tuned in to those positions that drive short term flows and prices. If it’s possible, I would suggest making an effort to explicitly note your impression or what you hear regarding those dealer positions in your daily open and closing comments.

    A simple single sentence about that factor would be a huge help in understanding market price action. And it would help those of us out here who might not be as plugged in to the dealer network as yourself. Just a suggestion, so obviously feel free to take or leave it. Either way, all of us out here truly appreciate your contributions here.

Post a Comment