Tuesday, January 16, 2007

Before the dark times... before the Empire

A very weak Empire Manufacturing number initially put a bid in the bond market, but now the market is fading a bit. After being up around 10 ticks earlier in the day, the 10-year is now only up 1/8. Swaps had been 1/2 bps tighter, now unchanged.

I think the fact that swaps have widened at the same time as the 10-year selling off is indicating cash sitting on the sidelines. Asia is still absent, as they have been in recent weeks, which backs up my idea. If that's right, then even moderately weaker economic news in the coming weeks could bring a significant rally.

Fed Funds futures are now showing an overwhelming odds of no move between now and May. Using Cleveland Fed estimations, the odds of a 5.25% Fed Funds rate in May was around 45% in late December, now 73%. Also in mid-December, the odds of two cuts (i.e., 4.75% funds rate) was over 20%, now only 2%.


HFT said...

Do you expect a BoJ rate hike this week , and if so , will we get a reverse carry=trade selloff similar to last year's ?

Thanks in advance

Accrued Interest said...
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Accrued Interest said...

I had thought they would, but now I'm hearing that they won't. I don't follow the BOJ as closely as I probably should, but I think they want to be extremely careful not to choke off the progress they've been making.

As far as the reverse carry trade, I have made some in depth comments about that here and here

I think rising rates in Japan will have a material impact on world wide liquidity, which will probably cause credit spreads to widen. I have less of a view on how quickly this might happen, but my forecase is for wider spreads regardless, so the ZIRP thing is just another reason to see wider spreads.