Don't get technical with me! 12/4/2009

Well! -11,000? I didn't see that coming. And I think its a game changer. There is no way the Fed can keep rates at zero while unemployment is falling. I just can't see it. I'm also willing to go out on a limb and say that one jobs start turning positive, they will stay positive. This doesn't leave me expecting blow-out GDP or anything like that. Its still a tepid recovery. But I think 4% 10s are on our target screens now.

For what its worth, here's where Fed Funds futures are. Pricing about 50% chance of hike in June. I've got to admit that you have to apply some odds to a hike in April. Suddenly my Taylor Rule post doesn't seem so crazy!


Alright on to the technical picture. Last week we bounced pretty hard off the 3.20% area which now looks like a triple bottom.

I also threw 3.48% on the chart (red line). Can't really say its a top since we broke it several times recently, but notice there's been a lot of work done right around that area. So I really wouldn't be surprised if we need to consolidate around this 3.48% area before we can push much higher in yields. Notice below that we're closing in on an over-sold area as well. (Note I'm using price of the old 10-year for this chart).



Once that happens I think its 3.71% then the recent high of 3.95%.

Meanwhile, back at Echo Base, check out the curve slope. This should be the real story when thinking about potential rate hikes. Strangely we're only 1bps flatter today. The 2-year should getting hit much harder than it is. Anyway here is a quick slope chart. Some people poo poo using resistance points with spreads but think about what the slope is. Its how much extra someone gets paid to go out the curve. Here it looks like when the spread hits about 265, investors start pushing out the curve...


Long-term I think the target might be +50 or zero, so this could be a huge play. How to play a flattener? You usually do something like short 10's and go long 2's and 30's in a certain proportion. Its a trade that often requires significant leverage and/or access to options on rate futures to really pull off. Our regular Joe readers ought to consider shorting mortgage REITs like Annaly Mortgage. They live for a steep curve.