Ex-Hedge Fund Portfolio Manager, Full-Time Parent, Data Scientist and Rates Trader
“Incentive structures work, so you have to be very careful about what you incent people to do because various incentive structures create all sorts of consequences which you can’t anticipate.”
This note is about the role of compensation & incentives. Specifically, those structured by the Federal Reserve & how they seem to be veering far from the mark.
Friday’s position shift across the front-end of the interest rates curve was the single largest swing in the last 6 months by a multiple of 2.5x, bearing tell-tale signs of new shorts. As the prospect of a trade truce drove giddy selling at the lows – with most of the volume going thru prior to the Fed’s midday announcement – there was ample room for a counter-trend move, a staple of the 2019 trading diet. The subsequent reaction in the afternoon & again this morning (the latter being triggered by the inevitable negative trade headline we all have come to expect as the new normal) is nothing more than a brutal punishment of that behavioral bias most innate in all of us.
If it looks like a duck and it quacks like a duck… well, it doesn’t really matter what the Fed says – it’s probably gonna trade darn like a duck, too.
From repos to POMOs & from LSAPs to QE, here’s what every trader needs to know.
So you’ve heard that LIBOR is going away, due to be replaced by SOFR? Well, if you’re not a regular user of interest rate swaps & swaptions (which, unless you’re an institutional-level client, is probably true), then what you really care about is how this impacts the thing you can most readily trade: Eurodollar futures. Here’s how Eurodollars are going to work after LIBOR.
The fate of LIBOR is likely to precipitate one of the largest one-off structural changes to the interest rates market in our lifetimes. Regulators are growing increasingly concerned because we’re ill-prepared for what comes next. Thus, more ad lib experimentation by policymakers.
It’s a tectonic shift in a $400 trillion+ market.
The Federal Reserve lowered rates today. At least that’s what they want you to believe. In a sign of just how little confidence the front-end has in the Fed, the funding market is hiking rates faster than the Fed can cut them.