i am at this point agnostic about interest rates. which is a polite way of saying i am confused and have no idea....well, i actually have too many ideas, which is just as bad. and one of those ideas, which is my "dream scenario" du jour, is for rates to be jacked thanks to, say, a one month spike in payrolls. although the Fed has telegraphed it will need several months of growth to raise rates, i would not be surprised for the market to "extrapolate" rather rapidly from a single brightish data point.
given the rate volatility which reflects rampant speculation and hedging, any "dislocation" could cause a rapid rise, fundamentals be damned. (this is what got me nervous last week, when i closed out my long positions in long bonds.)
as an example of "dry powder" which could ignite in the event of any bearish data points--CI had a piece not long ago showing that the Carribbean Islands (i.e., hedge funds) are the third largest UST holders after Japan and China, i believe. the hedge funds are playing the UST carry trade--borrowing short at 1%, and lending long (buying 10yr USTs), and doing this with "modest" leverage of, oh, say 10x. so with the 10yr at 4% they can make 30% on equity if rates remain stable, plus any upside that comes from declining long rates.
but of course they are "hot hands" which can sell in a heartbeat if it looks like rates will rise. CI pointed to the vicinity of 4.65% or so on 10yr yield as a "danger area" where hedgies could depart en masse.
that's just one scenario, which could cause a rate spike unjustified by fundamentals, providing perhaps an attractive entry point. (much as, in the opposite direction, delta hedging by mortgage investors caused rates to plunge early last summer, again ahead of fundamentals).
that is one scenario which may or may not come to pass, but if it does, i will be on top of it.
all jmho, of course. |
