I agree with Bill Gross, the front end of the yield curve is mispriced here. Specially after today's sell-off. I'm long ZQJ5 Yes, the fed wants to taper but they do not want interest rates being on the moon, its going to slow down the economy and hurt the recovery. I believe they will have to talk down rates in the next meeting even though they might taper (they will have to provide dovish guidance on rates)
This is my first time buying fed futures since 2011. I'm not playing as big as I used to but maybe I should. It seems that the rate panic has the market disconnected from the Fed guidance and likely path of rates. Frankly I'm just a little scared here. The last 2 hike cycles the Fed did 300 bps in 12 months after the start. This is one of the trades that you can lose a lot if wrong
Most in the FOMC thinks fed funds will END 2015 at 1% or lower. My contract is for April of 2015. If it ends at 1% there won't likely be any loss in these contracts because they will probably start the hikes by mid year or year end The vast majority thinks it will end at 1.5% or lower, if the guys between 1-1.5% are right, there could be a loss but come on, it can't be that big given that the contract is from the start of the year. Also Bernanke said they would have to be gradual in the hiking cycle. At the very worst this contract month might get one rate hike, in that case, it STILL makes money I'm aware the fed forecast is likely to change but market prices have diverged significantly from the Fed, ala 2008-2011
The April meeting is usually at the month's end, so the decision on April 2015 won't affect the contract settement. Essentially the market is pricing TWO full hikes by March 2015. Seems overpriced by AT LEAST one hike, probably two
If the amount of members who think rates will be at 1.5% or lower by year end 2015 increases as I expect, this might not be that big of a deal. Its an overwhelming consensus in the Fed that the first hike comes in 2015, with just two meetings in my contract (and only one with projections and a press conference), two hikes is just too much maybe they can do one in the first meeting with the press conf but even that is a bit unlikely given that they are usually optimists in their econ forecasts
Only scenario where this trade can go bad is if the economy really takes off, beats all private and Fed forecasts, employment heats up and inflation surges. If things proceed as they are likely to the market will have to reset its expectations to match the Fed's employment/inflation->FF level calibration
Best of luck with this trade, Daal... All I'd say is that in 2010 the red FedFunds contracts were trading arnd 120bps lower than today; in 2011 arnd 75bps lower. I find it really hard to find reasons why this can't happen again.
The difference is that the Fed "ended" that game by guiding on rates. I say ended in quotes because I thought the market wasn't going to diverge materially from it, but that was wrong and it happened now. Back in 2010/2011 I was speculating the Fed needed a lower unemployment rate to hike than the market was thinking, now I'm not speculating anymore, the Fed has pretty much confirmed everything Frankly, I probably won't even have to hold very much to make $ there. This seems to be a liquidation by big funds (in all US rates markets) and prices will snap back soon. Then I can sell half or most of my position and hold the rest to see if I'm right
But the main idea here is that the Fed won't allow this material divergence without going all out on "open mouth operations". Rates are getting so ahead of the Fed that its more likely than not the Fed will say something about it. This creates some kind of floor support on the front end imo