Lonely morning on trading floors

Not much to talk about in front of the Fed today. The market is very quiet waiting to see what the Fed statement will say. Probably not much, but sentiment seems pretty bearish so a moderate sounding statement may bring a small rally. Fed Funds futures now price in a ~15% chance of a hike in January, which is a sharp contrast to a few weeks ago when futures started to price in some chance of a cut at the same time. Still seems like the front end ought sell-off more than where it is. On longer bonds, I'm feeling very neutral. Over the next 12-18 months, I think the curve will develop a more normal slope. Like +25 to +50 between 2-30. But if the Fed indeed hikes one more time, but the market still expects cuts over the long-term, then the inversion will get deeper, at least for now, with the 2-year rising and the 10-30yr area standing still. Unless the Fed actually manufactures a deflationary environment, I think the upside (i.e. declining yields) to the long-end is limited to 25bps or so.

With limited upside, I can't see adding to the long-end of the curve here. I hate positioning my long-term portfolios for relatively small moves, because I'm taking a fair sized risk with my clients money for what I only expect to be a small reward. Also, whether I'm able to capture that small reward depends very greatly on my ability to time the move just right, which is always difficult. Plus, in this market, going out the curve might cost you income generation. Income is a known quantity, and its very hard to give up a known quantity for a possible reward that isn't that big to begin with.

One thing that is worth acting on is my MBS position. MBS will probably cheapen in a deeper inversion scenario, and that puts my MBS overweight at risk. Corporates most likely also get cheaper, but I'm already underweight there.