RJO FuturesCast

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Interest Rates

Is the Fed Ready to Vacuum Up Helicopter Ben’s Stimulus?

Posted 07/27/2017 1:02PM CT | Tarik Husseini

Yesterday the Federal Reserve announced that it would not raise interest rates.  That decision was widely expected as the next hike isn’t anticipated until the end of the year.  Of note was a quote from the FOMC that “The committee expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated.”  Language in the statement also included a target date of September to begin the rollback of the 4.5 trillion portfolio of bonds that the Fed has accrued since the financial crisis and Great Recession.  This will entail selling Government and Mortgage bonds that were bought during a period of stimulus in which Ben Bernanke gained the nickname “Helicopter Ben”, alluding to an image of throwing money from a helicopter to halt a liquidity crisis, and stabilize a rapidly deteriorating economy in 2008.

Currently, 30yr bonds are on a three day 3 point slide to 152’10 in the September bond future.  This slide has been concurrent with the S&P reaching new highs, and the VIX plummeting to the 8 handle.  Even though bonds have fallen, it’s a bit surprising that they are staying at these lofty levels, considering the economy is stable, and the Fed has indicated that it is moving towards higher rates, and a reduction of balance sheet.  Political uncertainty regarding the Trump administration and its economic agenda is most likely playing a role, but Inflation may be the key for now, as it remains subdued. 

Technically, the 148’00 to 150’00 level has been solid support since June of 2015, with the 152’00 level being a speed bump.  On a continuous chart, it looks like we are in a consolidation phase between 148’00 and 158’00.  So taking positions between the extremes, with the idea of exiting, and reversing on a breakout makes sense.

 

30yr Treasury Daily Chart

30yr Treasury Daily Chart

Tarik Husseini