Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Fed to Raise U.S. Interest Rates in 9 Months

Interest-Rates / US Interest Rates May 18, 2014 - 03:12 PM GMT

By: EconMatters

Interest-Rates

James Bullard Speech

The biggest news to come out of Friday`s financial market activity was James Bullard’s thoughts on when he expects the Fed to start raising rates, he believes the Fed will start raising rates sometime near the end of the first quarter of 2015.

He also said, “While first-quarter GDP growth was weak, growth in coming quarters is still predicted to be robust,” according to slides for his speech. He added, “the average quarterly pace of growth in 2014 may still be an improvement relative to 2013.”


But the Fed may raise rates even sooner as we have thought that the market has become too complacent with regard to the Fed “talking down the market” which is at odds with the robust economic and inflation data of late, and the Fed will be forced to address the sharp rise in economic conditions of the second and third quarters “The FOMC would be ready and willing to get more aggressive if it was required,” including if inflation surged unexpectedly, he said. Another surging PPI report in the same direction fits this category in our opinion.

The bond market is really asleep at the wheel right now in our opinion. With the recent surge in bond prices, right before a sea change that has been 6 years in waiting, the raising of the Fed funds rate is about to begin, and there are a whole bunch of folks on the wrong side of this trade, and all this money is going to have to come out of the bond market.

Further Reading: The Worst Risk/Reward Trade on Wall Street

Market Squeezes Go Both Directions

Jeffrey Gundlach of Doubleline Capital has been talking up the notion of a bond market squeeze which of course would be good for his fund and his current positioning of the last six months, but squeezes work in both directions Jeffrey Gundlach, and there is far more money long the bond market right now than short, and yields are very depressed right before a sea change in terms of raising rates by the Fed.

All this long money has to come out with rising rates, I am sorry Gundlach but the real squeeze is going to be in the other direction after six years of a near zero Fed Funds Rate, rates are going to be raised and normalized, and according to James Bullard and Janet Yellen the fed will be targeting a normal short-term policy rate of 4 percent to 4.25 percent.

Six Years is not a Lifetime: Historical Interest Rates as Contextual History Lesson

The writing is on the wall, after six years of extremely loose monetary policy rates are going the other direction in the United States; and England is going to follow suit as their economy and inflation concerns have been on the rise as well, expect rate hikes likewise coming out of England in our opinion.

Thus all this money came rushing into the bond market right before actual rates are going to be raised, talk about great timing and squeezes, over the next five years this is going to be one of the massive squeezes of all time, and in the short-term the 10-Year yield is going to blow past 3% faster than you can say December.

Remember those PPI, CPI and Employment reports are going to be hitting the Fed with an inflating and accelerating economic reality, and the Fed may be forced to act even sooner than 9 months with a couple more hot PPI and CPI reports like last week, and several more 250k plus Employments reports, it is going to get downright ugly in the bond market as all those longs of six years run for the exits under a normalized rate environment.

The Levered up Yield Trade & The Unwind of Fund Flows

Accordingly, thanks Jeffrey Gundlach for being mindful of squeezes in the bond market, because we are right at the precipice of the biggest Short yield squeeze in the entire history of the bond market with the actual raising of interest rates by the Federal Reserve after six years of extraordinarily low short term rates in terms of monetary policy that created artificially low yields that are about to adjust much higher or normalize.

Just think the amount of money levered up to chase yield because there has been so much cheap low interest rate money to borrow, and leverage up the yield trade, artificially pushing yields even lower, all this money has to be unwound with the raising of short-term rates – this is the worst carry trade in the history of financial markets right before a sharp upturn in short-term interest rates and a massive re-pricing of the entire interest-rate market!

Calculate the massive amount of funds, derivatives and hedges that now have to start unwinding in the other direction – talk about wrong-footed and mispriced markets!

Investors currently looking at the wrong market for being a bubble: hint it`s not Google

Everybody has talked about the bubble in the bond markets for six years, but with each passing year and near zero percent interest rates, more complacency has sunk in with the status quo thinking that this low rate environment is the “new normal”. But this couldn`t be further from the case if we review what constitutes normal short term rates, and this complacency was reinforced and even perpetuated by the Federal Reserve itself with their dovish talk and actions of the past six years.

Now that the interest rate environment is about to change, and everybody should be on their toes, all the bond participants are in a sleep induced coma, and asleep at the proverbial wheel, not being prepared for the shock of their investing lifetimes. Yes short-term interest rates are going to rise in the United States and England in anywhere from six to nine months’ time - and the entire investing community is poorly positioned, and on the wrong side of the market. The bond market bubble is about to burst folks!

By EconMatters

http://www.econmatters.com/

The theory of quantum mechanics and Einstein’s theory of relativity (E=mc2) have taught us that matter (yin) and energy (yang) are inter-related and interdependent. This interconnectness of all things is the essense of the concept “yin-yang”, and Einstein’s fundamental equation: matter equals energy. The same theories may be applied to equities and commodity markets.

All things within the markets and macro-economy undergo constant change and transformation, and everything is interconnected. That’s why here at Economic Forecasts & Opinions, we focus on identifying the fundamental theories of cause and effect in the markets to help you achieve a great continuum of portfolio yin-yang equilibrium.

That's why, with a team of analysts, we at EconMatters focus on identifying the fundamental theories of cause and effect in the financial markets that matters to your portfolio.

© 2014 Copyright EconMatters - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

EconMatters Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in