Sunday, June 10, 2007

Is the market begining to meltdown....

This was certainly an interesting week for Fixed Income. New Zealand and Europe decided to raise rates and it seems that the U.S. market got spooked. 10 year yields got to about 5.25% from 4.8% just a week or so ago. Friday morning Fed Governors were out making sure that everyone was aware that they had no intention of raising rates anytime soon. This seemed very interesting to me.

Speaking with a few friends in the market the "theory" goes like this. As goes the 10 year so goes the economy. Every other quarter GDP has been up and then down. When rates are high (as they are now) the next quarters GDP (in this case the 3rd Quarter) will be lower. When it is low, as was the 2nd quarters, growth will be on the higher side. This as more and more of our economy is tied to variable rate debt and as such our cash flows suffer and benefit from the variable rates. This could be why the Fed Governor's were so quick to speak out about not raising rates ? They are aware of this correlation and do not want to risk pushing Fixed Income over the edge. It seemed to provide some stability to the market on Friday. Amazingly Emerging Markets rebounded quite nicely and Stock's closed up on the day, regaining most (if not all) of the previous day's losses.

For now I am staying the course and remain Short Brazil rates (they cut 50bp this week and more cuts are on the horizin). Short Mexican rates, as they did not move rates at thier last meeting (after an unexpected rise the previous month) and short Argentinian Rates. I expect a bit of a retrace lower in U.S. rates but I think I will play that in the spot market and go short the dollar against the Euro (currently I am short Euro's but I will cover that on Monday).

Thse markets certainly have not been easy and most people I am talking to are trying to stay nimble and see where the chips fall. If you have a strong conviction I think there will be some over shoot in these markets and you can have opportunity to fade the markets. But be careful.




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