Treasury Markets had a mixed month during the month of January. Markets sold off in the event of strong economic data and rallying when reports came less than expected. Notable events of this month are,
a) Stabilization talks of Euro
b) Rising inflation concerns fueled by food prices in EM world
c) Economic indicators confirm that US recovery is on track
d) Shiller index double confirmed housing is still in doldrums
e) Uprising in Egypt
f) FOMC ritual meeting
For the month of January, 2y yields are down at 0.54, and 10y rates are slightly up at 3.32 but 30y yields have risen to 4.53. This shows market is currently facing headwinds from fears of geo political tensions and inflation concerns at different sectors of the yield curve.
Most of the drivers of market in January will remain intact in the month of February. This means, there will be fluctuations of the interest rates at the current levels. Rates might not move far from current levels. 30y rates will respond primarily to the inflation concerns around the world.
Central Bankers at china, Brazil, India and other EM Countries are taking all measures to fight the inflation, hot money flows and appreciation of local currencies. Currently leaders at Europe are performing public act of consensus. I guess dollar index will see some lows here, as Euro will strengthen on this news.
Egypt is right now in flux and situation is getting volatile minute by minute. What will be the outcome is tough to predict at this outset. One scenario that I can imagine is new government taking the driver seat with still few controls in Mubarak’s hand. We should keep in mind what Saudi’s view on the Egypt’s uprising when predicting the outcome. It is not that easy to eliminate the power infrastructure in place. Overreaction in oil prices is a reason to sell rather than buy OIL. One possible spillover if it reaches to house of Saud then we should see the oil shooting to north of 100 and yield curve rallying to its September 2010 lows.
Volatility moved slightly in the long end. It fell more than 20 normal vols in the upper left swaption volatility grid. Volatility surface got steeper. One observation is payor skew is getting richer across the grid.
Sunday, January 30, 2011
Tuesday, January 25, 2011
Note on Robert Shiller comment on Inequality
Rising Inequality is central cause of current financial crisis.
Robert Shiller Notes
I think inequality is a huge emerging problem, and that our society has to think about dealing with it in a constructive and real way – not through ‘Let them eat credit,’ not through wishful thinking. We have to understand how we get inequality and what we can do about it.
On this topic, we have seen many books written and being written. I guess this is one more area for researchers to obtain grants to keep their plates from being empty.
Definitely, policies framed by governments have consequences. Some are good and others bad. This Inequality sows seeds for rebellion or revolution. Every society likens wealth, prosperity, leisure and luxuries of life. These vary time to time depending on the availability of technology. To obtain these goods societies need to be competitive and strive hard. In corporate finance lingua franca, a company must strive hard to improve its profitability and invest in its growth lest it will be acquired and destroyed. Post world war II western societies have leaned towards welfare socialism with repentance. Modern America vacillates between capitalism and socialism. Last 50 years we have seen technology has changed how we live and work and obtain needs and luxuries of life. This transition helped dwarf one prime ingredient that is premise of success of any society or individual. That is called competitiveness. People knew they need to work hard to attain material success in life. During prosperous times people attribute success to their own skill and competitiveness. This way competitiveness is lost only to be born again. For this to happen sometimes societies have to be destroyed and other times needs a time to regain. Only time can tell to which category a society belongs. I will quote few examples here from our own human history. Roman Civilization fell off the cliff due to series of issues like internal fights, rise of Christianity and few more. These are the visible factors that have destroyed the inner competitiveness of a society and made it vulnerable to invasions of barbarians. Another example is Pakistan. This country spends most of its energy in war with its neighbor, clandestine support to terrorism and religious fundamentalism. Consequently ordinary people struggling to bring bread to their families are getting crushed in these priorities. This is another way of looking at fall in competitiveness.
In current European crisis we are witnessing again same factor coming to the fore. The countries that are currently vulnerable to this crisis are least competitive with in European union. These are Portugal, Italy and Greece.
Therefore, Countries and societies should understand, natural endowments and technology can bring wealth to one generation. But lack of competitiveness will unleash its wrath and take away everything swiftly and abruptly in the wink of an eye.
Robert Shiller Notes
I think inequality is a huge emerging problem, and that our society has to think about dealing with it in a constructive and real way – not through ‘Let them eat credit,’ not through wishful thinking. We have to understand how we get inequality and what we can do about it.
On this topic, we have seen many books written and being written. I guess this is one more area for researchers to obtain grants to keep their plates from being empty.
Definitely, policies framed by governments have consequences. Some are good and others bad. This Inequality sows seeds for rebellion or revolution. Every society likens wealth, prosperity, leisure and luxuries of life. These vary time to time depending on the availability of technology. To obtain these goods societies need to be competitive and strive hard. In corporate finance lingua franca, a company must strive hard to improve its profitability and invest in its growth lest it will be acquired and destroyed. Post world war II western societies have leaned towards welfare socialism with repentance. Modern America vacillates between capitalism and socialism. Last 50 years we have seen technology has changed how we live and work and obtain needs and luxuries of life. This transition helped dwarf one prime ingredient that is premise of success of any society or individual. That is called competitiveness. People knew they need to work hard to attain material success in life. During prosperous times people attribute success to their own skill and competitiveness. This way competitiveness is lost only to be born again. For this to happen sometimes societies have to be destroyed and other times needs a time to regain. Only time can tell to which category a society belongs. I will quote few examples here from our own human history. Roman Civilization fell off the cliff due to series of issues like internal fights, rise of Christianity and few more. These are the visible factors that have destroyed the inner competitiveness of a society and made it vulnerable to invasions of barbarians. Another example is Pakistan. This country spends most of its energy in war with its neighbor, clandestine support to terrorism and religious fundamentalism. Consequently ordinary people struggling to bring bread to their families are getting crushed in these priorities. This is another way of looking at fall in competitiveness.
In current European crisis we are witnessing again same factor coming to the fore. The countries that are currently vulnerable to this crisis are least competitive with in European union. These are Portugal, Italy and Greece.
Therefore, Countries and societies should understand, natural endowments and technology can bring wealth to one generation. But lack of competitiveness will unleash its wrath and take away everything swiftly and abruptly in the wink of an eye.
Sunday, January 2, 2011
Interest rates and Volatility – Jan 2011
Global markets have fared reasonably well in 2010. We are entering 2011 with an elevated uncertainty to the outlook for economy and interest rate markets. Broadly speaking rates will rise slightly and tend to remain range bound.
Trading Strategies
1. Receiving fixed rates in the USD forward rate space to capture roll down as Fed is going to be on permanent hold.
2. Rate movements have been predominantly economic data dependent. This creates huge volatility. As economy improves, activity indices are showing signs of rise and so interest rates. Conversely rates are falling in a bad economic news environment.
3. Data dependent rate moves are altering skews and creating opportunities in Swaption skew space.
This means 50 bps & 100bps OTM receiver and payers can be bought and sold opportunistically.
Trading Strategies
1. Receiving fixed rates in the USD forward rate space to capture roll down as Fed is going to be on permanent hold.
2. Rate movements have been predominantly economic data dependent. This creates huge volatility. As economy improves, activity indices are showing signs of rise and so interest rates. Conversely rates are falling in a bad economic news environment.
3. Data dependent rate moves are altering skews and creating opportunities in Swaption skew space.
This means 50 bps & 100bps OTM receiver and payers can be bought and sold opportunistically.
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