Traders TEST Central Banks

Some bond market participants have taken matters into their own hands and are testing global central bankers. Rates are rising in such a way that is in ‘direct conflict’ with global central banking policies of low rates. 

The narrative which continues to be repeated until it is believed is that rates are UP as a reflection of confidence in the economy. IF that were the case, THEN one might think such aggressive fiscal stimulus making its way through the halls of Congress might NOT be necessary.

THAT debate aside, today’s move UP in rates is as much a reflection of liquidity and a LACK of confidence (in the Fed) and is another seminal moment in markets, writ large. There is much at stake. 

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The Tell

Rise in short-term Treasury rates may come in ‘direct conflict’ with easy Fed policy, warns broker dealer

Published: Feb. 25, 2021 at 2:15 p.m. ET

By Sunny Oh

“This is in direct conflict with what the Fed says versus what they desire,” said Steve Feiss, director of fixed income at Etico Partners, in emailed comments.” 

…Investors have been eyeing movements in the 5-year note, as it roughly overlaps with the expected timetable for the central bank to carry out its course of rate hikes after dropping them to a range of 0% to 0.25% at the pandemic’s onset. 

But Feiss at Etico Partners said even the recent surge in short-term rates may not be enough to prompt Fed action, particularly as trading in eurodollar market suggest most rate hike expectations were back-ended toward 2023 and 2024, aligning with when the central bank was expecting its first rate hike.

For now, traders are testing the Fed to see how (or IF) they’ll react in similar fashion TO other central bankers. So far, this has NOT been the case.

Here is what this TEST looks like. 

3mo Eurodollar Spread June 2022 vs June 2024

(click HERE to enlarge visual)

This parabolic move HIGHER is pricing in of rate HIKES. Higher rates are counter TO what both the Fed as well as lawmakers crafting expensive stimulus bills, want.

This TEST is worth watching and will be resolved one way or another. As always, consult your Etico Partners financial expert for more on how this TEST impacts you and your specific situation. 

Steven J. Feiss

Managing Director, Fixed Income

Etico Partners, LLC

1795 Rout 9 Clifton Park, NY 12065

Office: (732) 683-9222
Mobile: (914) 450-9668

feiss@bloomberg.net
sfeiss@eticony.com

Meet the Author

Financial markets veteran with more than three decades of experience working with high profile, domestic and international asset managers and trading desks, producing customized and actionable solutions for strategic alpha generation and risk mitigation. Author of a unique daily (6x per week) cross-asset macro market commentary (the BondBeat) to inform and assist INSTITUTIONAL FIXED INCOME investors and trading desks.