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Bond rally nearing an end?
- Thread starter gharghur2
- Start date
The steepeners have been getting killed for years, that is why almost everyone has had flatteners on and will continue to do so as foreign central banks hold the long end of the curve at lower rates than normal and the Fed continues to raise rates more than expected to slow down the housing boom as a result of lower mortgage rates indexed off the 10yr Treasury. Essentially the flattening players will begin to unwind as we hit a peak in the Fed Funds rate, a possible economic slowdown, and possibly a cut in the Fed funds rate. Most of the biggest players are not expecting this until late 2006/early 2007, and are watching housing to confirm it. That being said, guys with deep pockets like PIMCO can afford to be early on their steepeners (right now long 75,000 FOB's) while the others continue to ride out the end of the flattening phase. When all of the hedge funds get out of their carry trades/flatteners then it won't be pretty, remember around hurricane Katrina, the move in the curve was basically instantaneous and dangerous to those who continue to add to flatteners.
Quote from mcurto:
Almost everyone has had flatteners on and will continue to do so as foreign central banks hold the long end of the curve at lower rates than normal and the Fed continues to raise rates more than expected to slow down the housing boom as a result of lower mortgage rates indexed off the 10yr Treasury. Essentially the flattening players will begin to unwind as we hit a peak in the Fed Funds rate, a possible economic slowdown, and possibly a cut in the Fed funds rate. Most of the biggest players are not expecting this until late 2006/early 2007, and are watching housing to confirm it.
Makes sense technically too
thx
Quote from mcurto:
When all of the hedge funds get out of their carry trades/flatteners then it won't be pretty, remember around hurricane Katrina, the move in the curve was basically instantaneous and dangerous to those who continue to add to flatteners.
One question: maybe I am missing something, but at what point does inversion cause a flattening trade to become a negative carry trade? Also, I think I read where the swaps curve has never fully inverted. So are the funds putting on flattening trades there instead of treasuries?