Notes From Underground

Happy father’s day to all who are one and have had one. Just nine months ago the markets were experiencing convulsions as the then-U.S. president would unleash tweet after tweet at all hours. We certainly don’t miss the key-word-driven algos creating volatility with the tip of their finger. The markets got a jolt last Wednesday when the Fed tweaked its administered rates — interest on excess reserves and the offering yield on its reverse repo facility — by 5 basis points in an effort to prevent short-term rates such as TREASURY BILLS from pushing into negative territory on a SUSTAINED basis as cash continues to flood the market, a consequence of the central bank’s ongoing QE ($120 billion a month). Adding to the deluge is the U.S. TREASURY, which has been running down its cash balance from an all-time high of $1.8 trillion.

The FOMC is now providing 5 BASIS POINTS of support above zero to money market funds and government sponsored enterprises — entities earning nothing at the Fed — coupled with an increase to 15 BASIS POINTS for IOER for the institutions that are able to earn interest on their reserves.

The “drastic” change in the DOT PLOTS also gave MONETARY HAWKS sustenance for an FOMC REVERSAL. The DOLLAR rallied as GOLD, SILVER and all the metals declined in response to the narrative to the end of the flexible adjusted inflation target (FAIT). The thinking goes that the FED will not allow inflation to run hotter for longer as has been the disposition of the market for the previous 10 months.

My sense is that this will not prove out. The massive selloff over Thursday and Friday was the result of the reflation trade being way overleveraged and margin clerks ruled the post-FOMC markets. Let the markets continue to correct for that is all part of being a successful trader.

Just after the Powell press conference I sat with Anthony Crudele for a discussion in real-time about the FED actions. We covered what turned out to be the most significant trade on Thursday and Friday, the flattening of the 5/30 yield curve. I think the FED tweaks put pressure on the BELLY of the U.S. curve as all the long-held steepeners began to unwind.

Just three weeks ago we were discussing the 30-year bond as the LEVER for the algos. Eeverything was rallying as the 30-year bonds rallied. That ended this week as the 30-year yield dropped while 5 year yield rose more than 20 basis points. The question is will the 5-year become the new fulcrum as the yield curve tries to reset in the face of “FED HAWKISHNESS”?

This is just the beginning of a potential change in the DOLLAR and many other asset classes, BUT I CAUTION I AM VERY SKEPTICAL AT THIS JUNCTURE FOR FIVE BASIS POINTS WITHOUT ACTUAL QUANTITATIVE TIGHTENING is not enough to change my thoughts on the FED and its credibility. Here’s to those who make their money from Wall Street and NOT ON WALL STREET. But tweaks are steps above tweets for providing information. Now we will move on to context as Eric Peters did in his missive today. Without nuance and context one might believe the global growth story has been shelved. Not NOTES FROM UNDERGROUND where 2+2=5 is a quality supposition.

Tags: 5/30 Yield Curve, Federal Reserve, IOER/RR tweak, U.S. Dollar, U.S. funding markets

This entry was posted on June 20, 2021 at 6:50 pm and is filed under Debt Market, Fed. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.