New 'Twist' on Fed's rate rise

Bond futures are now betting no rate hike until March of 2016. This goes with my post from two months ago that your World Champion NY Mets would be playing baseball again in spring before any hike could be discussed, never mind implemented.

We get three Fed speeches today including NY Fed chief Dudley and Fed head Yellen. So it depends on the batting order whether we get “Hike, No Hike, Hike” or “No Hike, Hike, No Hike.”

It is always a mixed message.

I am still looking into the scenario I was tipped to last week. I don’t see the exact language but it goes like this since I can’t nail it down.

In September 2011 under Operation Twist, which could also be called QE2.5, the Fed guaranteed ZIRP (zero interest rate policy) through June of 16 on the treasury instruments they issued.

I am told these notes with notional value in the tens of trillions of dollars can only be repo’ed if rates rise. The global banks and the Bank of International Settlement demanded this guarantee in order to hedge against inflation, which all central banks thought would be a problem under the different QE policies.

Therefore should the fed raise prior to June the penalty to its balance sheet in payments would be huge.

So the argument goes that the Fed will jawbone a rise in rates for the next 8 months or so with no real conviction to do anything until the middle of next year.

Everything I see coming out of the Fed seems to confirm this playbook and the futures bond market may have caught up with this thinking as well.


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