The narratives coming out of the banks in the most recent reports have a dire warning theme running through them.
The worry of a market collapse weaves its way through reports from Citigroup, Morgan Stanley and a few others I have glanced at since Labor Day.
Most hint of a bond vigilante rise arriving in the coming weeks, creating trillions in losses.
Now this move has to be predicated on Janet Yellen’s Fed raising rates this month. While the jawboning is strong coming out of the Fed saying September is on the table for a rate rise, there is little evidence in the US economy to support the move.
However, the Fed may have another motive for raising rates, beyond affecting the yield curve. There could be a many reasons, which I can’t even fathom.
But let’s look at one that is a bit esoteric, but could be the driver behind a need to raise rates. Interest rate swaps are a huge derivative play within the global banking system.
These swaps are contracts — bets — in which two parties agree to exchange payments based on fluctuations in interest rates or other benchmarks indices like Libor. The notional size of the market is approaching $500 trillion with a T, so its something that would be on all central bankers minds.
I’m not going to pretend I know the intricacies of this market, but suffice it to say that a 0.25% move higher in US rates would have a tremendous impact on this market.
So Fed transparency aside, the job market is not as strong as Yellen & Co say it is. It’s quality over quantity and since inflation is not in the system in any shape or form just yet, there must be another motive, which I am not seeing, but maybe interest rate swaps is the start of the reason to raise rates.