which one leads?

Discussion in 'Financial Futures' started by ADX_trader, Feb 25, 2008.

  1. the short term or the long term interest rate futures?
  2. depends on if paper is flattening or steepening the curve...usually the 2 or 5 yr cash is the main product to initiate a sell or buy on the curve. That being said the curve will all move together if it is a big move.
  3. Thank for the comment.

    So you mean under normal condition, the short term IR move first. Do you know why?
  4. The FED has more influence over the front-end of the yield curve. The long-end, at times, can be in its own world.
  5. smalls


    like everyone else said, it depends on WHY things are moving.

    An event in the US will have a different effect on what leads then say something in the UK.
  6. Shagi


    The 2 year has been the leading light - very strong what a cracker - 30 year I believe manipulation is playing there to widen the curve with short term rates
  7. Think about the fundamentals for a second, and you'll see no "manipulation" is involved...

    You're a fund manager and have a bunch of money to invest in fixed income, and you have a choice between short term (say 90 day or 2 year) and long term (say 10 years, 30 years).

    If the economy is weakening, you want to shift money from short term to long term thinking the fed will lower interest rates. After all, you'd prefer to lock in high interest rates now rather than continually roll into lower interest rates as the fed lowers.

    If the economy is strengthening, you want to shift money from long term to short term thinking the fed is going to raise interest rates to fight off inflation. After all, why lock in a lower interest rate now when you can just wait a few months and get a better one.

    In other words, and in general, and ignoring the shifting of money from bonds to stocks...
    weakening economy = longer durations
    strengthening economy = shorter durations

    The tricky part is what to do with inflation. If inflation is expected to get worse, you want to shorten your duration. After all, why lock in a low rate now if rates will increase due to worsening inflation (assuming a constant nominal rate)?

    Again, in general...
    lessoning inflation = longer durations
    worsening inflation = shorter durations

    So, we've got a weird situation in the US now. The economy is weakening, leading to longer durations. However, inflation is getting worse, leading to shorter durations.

    At the moment, inflation fears are massively outpacing economic fears. Look at any DV01-neutral short-long spread and you can see this effect.
  8. Shagi


    Your views are relevant - but I think its manipulated to save the banks and possibly Wall Street from collapsing - the banks borrow trillions short term at lower rates and lend out long term at higher rates - the day that equation changes and flips there will be chaos

  9. if we had the inverted curve we had from 05-middle 07 the situation would be a little more sticky indeed there is still a credit issue it has gotten better since December but still is an issue.
  10. I'm not saying you are wrong but I don't understand how this can happen. The govt bond market is deep and hard to manipulate, not like an indidvidual stock. I am sure it takes billions of $ just to move the 10 yr rate by a basis point or two. How could long term rates be manipulated up without somebody agreeing to borrow billions of $ at higher than reasonable rates?

    The unusually low long term rates we had for a while were a little easier to understand - asian central banks were looking for a safe place to invest lots of dollars we were sending them. You could call it currency manipulation or just them acting rationally, but either way there was a story. But I don't see a story that goes with the recent steepening other than market forces, inflation fears, and where we are in the fed cycle.

    Do you have a theory of how this is happening or just a feeling the curve is too steep?
    #10     Feb 27, 2008