Wednesday, December 13, 2006

Bull steepener??

Yesterday's market action has me wondering if I've misread the street's expectations. I had figured that a cut was priced in by June, and that any minor change in the statement now would only be a set up for a June cut. In fact, the only real change in the statement was to describe the slowdown in the housing market as "substantial."

But the market gave us a bull steepener, meaning that rates in the short end moved lower by a greater degree than in the long end. As I said last week, a bull flattener means that the market expects Fed cuts sooner rather than later. While I agree with the idea that the Fed may cut 1 to 3 times in 2007, I just do not see that the Fed is setting up a series of cuts in 2007. And having Bernanke's crew publicly state the obvious about the housing market hardly changes my mind.

One idea that I keep coming back to is that the curve will eventually steepen. I believe that will take most of the upside out of the 10-30 year part of the curve. If the market has correctly anticipated the Fed's actions, then the long-end will be priced right first, and the short-end will catch up. I'm building a short-end barbell, with some floating-rate positions and some 5-7 year positions. I'm light in the 20-year area. I have some positions in the 30-year area, as protection against a big bull flattener.

No comments:

Post a Comment

Comment rules:
All comments must contribute to the conversation
All comments should be civil
No comment should include any personal attacks, however minor, on the author or other commenter.
Do not hawk your own website unless its a specific reference to the article
If you post anonymously, please give some identifyer
I will delete any comment which doesn't fit this criterea