Peak in Interest-Rates this Week for a while?after tomorrows rate-hike of FED, ... won't there be any further hikes this year? (Midterms)
UUUS Government Bonds 2 YR Yield
3.950%R
+0.038+0.97%
Yield
%
No trades
99'27'5% of parR
−0'02'2−0.07%
Price
US02Y trade ideas
2 Year Treasury Bond Yield vs FED Funds RateThis post is intended to show the current gap between the market for the 2 year US treasury yield on bonds and the official funds rate, and why the market is forcing central banks hands into raising interest rates when the market is in such a fragile state in ability to support and maintain debt at heighten interest rate levels.
Simply put, bond market are crashing (i.e. no one wants to hold onto treasure bonds at present because they are yielding very little / people are losing faith in governments ability to uphold their debt obligations / competition in the market for credit is rising etc. etc). All these factors play into buying selling behavior and is repriced in the market.
As a bond or lone has a fixed bond or repayment structure ($amount), if the capital price the bond changes hand in the secondary market is lowered, the effective yield from the bond goes up. For example if a bond is made for $10,000 and requires a 10% interest rate (i.e. $1,000) per specified period, then if this loan / contract / bond (same thinking) is changed hands in the secondary market and sold for $5,000, the new own still receivers the conditions of the prior arrangement. Hence $1000 per period. As the price was $5,000, then the interest or Yield on that bond is now 20% (i.e. $1000 / $5000 x100 = 20%).
As new credit is competing against the secondary market (i.e. you could loan your money out to a new loan or you could buy an existing loan (Bond) on the secondary market), this is how the bond market drives interest rates.
Complicated but hope this makes sense.
in summary, falling bond prices cases rising yields or interest rates. Raising bond prices causes lower interest rates.
Central Banks play in this market as a market participant with an unlimited check book (this is how new base currency or M1 enters the market ( QE - Quantitative Easing) or is removed from the currency supply (QT - Quantitative Tightening ).
If Central Banks want interest rates to rise, they flood the market with bonds, dropping the market prices with excess supply and causing yields to rise. If they want interest rates to drop, they soak up supply in the market of bonds, causing prices to rice and yields (interest rates to drop).
This process is called 'Open Market Manipulation'. AKA planned market manipulation at it's best.
www.federalreserve.gov
The 'official funds rate' is just a forecast which shows how the Central Bank plans to manipulate the bond market until it's next meeting.
Interest rates on loans / bonds etc should be viewed as a measure of risk of default. High interest rates reflect the reward on offer for lending your currency out and the risk you will not get it back.
In short, Market conditions (such as inflation ) changes investors view on risk. When Central Bank manipulation of the bond market goes our of whack with the risk to lending in the market, we see large gaps between the yield curves on bonds between the official funds rates issued by the Central Bank .
This gap is clearly shown this chart, comparing the 2 year yield against the Official FED Funds rate (the interest rate you hear about on the TV).
History shows the 2 year is a good leading indicator on what Central Banks will do with interest rates.
Make no mistake, the market and inflation is forcing Central Banks to raise interest rates.
I very much question the robustness of 'the economy' to handle higher interest rates at present.
Next Stop 2007 House Bubble Limit?Well the MoM general downward trend of the 2yr yield and the Fed Funds rate is broken. We've surpassed previous rates and looking now to reach the rates of the 2007/8 housing bubble. Yield inversion becoming flat, due to rising 30yr rates vice the lowering of the 2yr, and with newly relaxed lending for first time buyers, it looks like rinse and repeat for a bubble. Hopefully we learned from the past and only buy within our budget. Glad I was able to get a fixed rate. My money is on another rate hike from the Fed.
TVC:US02Y
FRED:FEDFUNDS
39. JHS and The Dot PlotYesterdays Powell's speech at the JHS carries ONLY one message -> there is NO PIVOT anytime soon. The US02Y seems to agree and promptly move up. It is now hugging around 3.40% which was the Fed Projection for Current Year 2022 as per the 06/2022 Dot Plot. What we can see is that Market is still thinking and awaiting direction as to what it thinks the 09/2022 would look like.
Prior to JHS, market was pricing in 75bps for 09/2022 and 50bps each for 11/2022 and 12/2022. This means market expecting rate hike at a SLOWER pace. Perhaps this would now require reassessment. What is the most important is HOW MUCH the Fed would project for Current Year 2022 in the 09/2022 Dot Plot? In the 06/2022 Dot Plot, Current Year was raised to 3.40% from 1.90%. This is an increase of 1.50%. Anything less than an 1.50% next month would be deemed as a SLOWDOWN in pace. My guess is that they would maintain the SAME PACE and raised current year expectation by 1.50% to 4.90%. And this would potentially gives us another 75bps in 11/2022 and 12/2022. Rates would end near 5.00% this year end!!!!!!
How would this affect EURUSD?
Well, this is easy enough. We would just look at the US02Y closely and wait for the 09/2022 Dot plot. If there would be a MAD DASH for DOLLAR, we would expect EURUSD to rise briefly. Remember, supplies can ONLY be found ABOVE. We should be well aware of the usual playbook. If not, just refer to the price action when the 06/2022 Dot Plot was announced. Price actually MOVED UP 150pips ++ in search of supplies. By now, you should know where to ENTER.
If indeed the Fed is to raise the Current Year by 1.50%, we can really make A LOT OF MONEY. Perhaps I need to sell ALL my bicycles to raise some cash so that I can trade more and make more profit :)
Till next time, have a great weekend.
P/S : As usual, do not just belief what I say. Use your common sense.
Crash inbound. 99% chanceFWIW I think we will be dropping to where the purple box is on my chart.
The bottom chart is the 2/10 inversion, with the inversion line being that horizontal blue line going across the chart. This means the 2 year bond is yielding a higher percentage than the 10 year bond, which means investors are rushing into long term bonds. What you can see from the horizontal green line on the bottom chart is that we are, as of right now, higher than we have ever been inverted historically, at least as far back as I can get the charts to go. Harry Dent made this his thesis for his dissertation, and surprisingly it has held up. Every single time there has been an inversion, or the bottom chart crossed that blue line indicating that there is an inversion, there was a correlating crash in the orange chart, or the SPX. I've depicted inversions and crashes in orange circles. The time frame is around 7-22 months for the whole crash to play out and the market to bottom. The small inversion in August 2019 led to the 2020 Covid crash, which could have been a coincidence. However, when a coincidence repeats itself accurately every single time something happens we call that a theory.
So my theory is that we will experience a 35-56% drop, just like the last three inversion. The market will bottom between March 2023 and June 2024. My reasoning is that the inversion has been so dramatic and the level of inversion is unprecedented. I will be purchasing some 2 year market puts next week and average into them if they start going against me.
Current state of key bond yields against the Fed Funds rateAny kind of spread inversion, whether it's the 3mo-30Y or 2Y-10Y is simple in principle: you will get paid more for shorter duration bonds compared to longer duration bonds. This is opposite to what normally happens, hence the term inversion.
Shorter maturity (<<10Y) bonds react more to Fed policy. Longer maturity (>=10Y) reflect long-term expectations of growth/inflation.
So if the shorter maturity yield is higher than the longer maturity yield, the bond market believes that near-term federal funds rate will be higher higher than future growth/inflation.
This means the bond market believes the rate hikes are high enough that a slowdown will occur requiring rate cuts.
Because there are many different bond durations (1 month to 30 years), you can have many different bond pairs that can be inverted or not. This is often displayed on a yield curve.
An alternative way to display this is to show the individual yields plotted on a single chart. Normal behaviour is when the yields increase with duration (i.e. whitest line at the bottom, reddest on the top). Inversion is when any shorter term yield line goes above a longer term yield line.
You can pan this chart around to see what happened in previous crashes and compare it to the current situation.
US02Y/US10Y bonds signals end to market rally. Bear FlattenerUS02Y up ~6%
US10Y up ~0.12%
Definition of a Bear Flattener = market go down.
Is it a perfect indicator? Of course not. But the tendency is that bear flatteners mean money is coming out of the market and going into short term bonds where it can come out of the quickest if market turns around. So the short term bonds act as a kind of pump/dump for the market. We are getting bear flattener headwinds ahead of CPI print next week.
Next week maybe market flattens out, momentum dies, slow stochastic falls below 80, and price sets up to go below prior "higher lows".
Keep on alert.
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33. A lesson on 'When will the FED pivot"???Dear followers,
From lesson 32 yesterday, we discuss that as far as EURUSD is concerned, SELLERS are currently in control.
The million dollar question is, when will BUYERS be in control again?
The answer is obviously knowing when the FED will pivot - stop raising rates!!!
One of the clear indication when this might happen is by looking at the MARKET. The MARKET always tell the truth. This can be seen from the US02Y, which is reflective of short term interest rate condition. Currently, it is trading above the 50MA. Once it drops below 50MA, this might be an indication from the market that the FED may be pausing its rate hikes. This is when we need to be careful in our trades and start to slow down our EURUSD sell orders.
P/S : As always, do not just believe what I say. Use your common sense.
