Tom, i expected a retest of the lows in the bond futures contract - note that it didn't close below the previous low. whether the test was successful or not will only become clear when it either reverses or collapses further. one thing is certain - the current levels will be defended tooth and claw, due to the vast amount of put open interest at strikes in the vincinity. note that when such levels fail to hold, the failure will be quite momentous as the writers of the puts will try to hedge their exposure by shorting the underlying contract, thus exerting additional selling pressure. therefore you are correct in adopting a wait-and-see posture.
however, i don't see a 50bp. hike coming all at once; AG is well known for his gradualism and dislike for unduly shocking the markets. most likely a 1/4 point hike will be followed by another one at the next FOMC meeting. the reason why i think a second hike is likely is that the first hike will probably do nothing to stop the bubble from expanding. AG is surely worried about the extent of the mania, even if he doesn't say so publicly. he will therefore try to let the air out slowly, an undertaking that is bound to fail imo.
the various rumors circulating in the market about a bigger-than-expected hike have to be taken with a grain of salt. one thing that gives me more reason to worry is the role of the hedge funds in the bond market. by all accounts, many of them are currently on the wrong side of the market, via highly leveraged yen carry trades. the BOJ is doing it's level best to bail them out, or at least give them breathing space, but this won't work forever. considering the sheer amount of BOJ intervention in the currency markets over the past few weeks and the negligible effect this has had on the yen/$ rate, one can already tell that the yen will soon continue on it's march higher. should that happen, forced liquidations by the hedge funds may hit the bond market. in that case at least a mini-BK would be likely.
regards,
hb |
