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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (4687)	1/9/2004 6:28:19 PM
From: Crimson Ghost	Read Replies (2) \| Respond to of 110194

I know this is getting tiresome, but my junk fund surged again today. Junk right now is a no lose investment. Junk goes up when treasuries rally as they did today. Junk also rallies when treasuries drop because spreads tend to narrow on such days. That plus yields that are still in the 7% area. Never in my long investment career have I had a large position in a sector that acts as perfectly as this one. I still find it hard to believe. Has not had a down day since Thanksgiving.

To: mishedlo who wrote (4687)	1/9/2004 7:44:21 PM
From: russwinter	Read Replies (2) \| Respond to of 110194

Great then, let's not confuse minds (and especially mine, as it's quite sharp), with opinions. I like that concept, so let's go to it? Ok, I haven't really chimed in on the ED, in fact you haven't seen a single post from me, regarding it specifically. To be honest I too was wondering if the markets would be "Bernankeed". Yes, I think you've made a good Bernankeed call, but that's not to be confused with what will actually transpire going forward. My points: 1. Sure, prominent posters here have been calling for higher rates. But I don't think that's meaningful at all. What else would you expect for a thread entitled, "Epic Bond Bubble, etc"? I would submit: largely bond bears. I agree you hear anti-Treasury sentiment elsewhere, but again it's mostly from bear sites, or credible players like Gross. Still, if you could quantify your statement with a bullish Marketvane reading on bonds or eurodollars(preferably after this week), you might get my attention a bit more on your sentiment argument? 2. But, let's take a look at what the market is saying this afternoon. cbot.com On Fed funds (FF), they are assigning no chance of a rate hike through April, and very little (18% likely) through June. They only surmise that a mere 25 bp is about 38% likely by July. Finally in August (after the distortions I've been describing run amok for ANOTHER seven full months or so) they think it's 76% likely. Well, you already know what I think of that theory, if you've read my posts. 3. ED1 (first future date out, now March) issues: On EDs we are seeing very narrow spreads, even relative to the FF rates that already have little rate increase expectation built in. In 1994, which marked a monetary reversal, the ED1 was 47bps above FF, right when the Fed surprised with little warning with a rate increase. ED1 then immediately spiked to 100 bps post-increase. Currently ED1 (March) is trading only 16bps above FF. And as I'm sure you know, EDs are not treasuries, and don't have the safety and quality of Treasuries. defined:http://www.moneyglossary.com/?w=Eurodollar Therefore, 16 bps above FF completely ignores not only rate increase surprise or pressure, but credit quality issues that might crop up in a crisis or unsettled market. You could see ED spreads widen, even without a rate increase. So to me, the March is a very low risk/high reward trade. The monetary reversal of 1999, was not an out of the blue surprise like 94. This time the Fed signaled it (neutral to up language) at an FOMC meeting. The ED1 spiked after that meeting from 27 to 70, even before the actual rate increase. That's the scenario I see as most likely. 4. ED2 (second future, now June) issues. The ED2/FF spread is also too narrow at 24 bps. Since I see this unfolding sooner rather than later, either would work. Maybe the preferred trade is to short the June FF future at 98.955 instead? Still I probably lean to the ED2 because it's such a liquid easy to trade market, and because (as I mentioned) credit spread quality could also get to be an issue, and for the leverage (more than E1) in a reversal. In 94 the pre-reversal ED2/FF spread was 65bps and went to 150bps during tightening. In 99, it went from 35 to 80. In conclusion the ED and FF market is just unbelievably complacent about nearly free borrowing rates in the face of massive economic distortions. And that's true (more so) even if Greenspan and Bernanke are as clueless as they seem to be. Maybe the market will get Berankeed again, but if so my risk is low. It's the Berankee boomerang effect (my posts over last two months) that I'm interested in. I think it could produce a quite spectacular ED rate spike. Eurodollar quotes: mrci.com