What's the trade ahead of Wednesday's Fed Decision? Find out from one of the most outspoken strategists on the Street?
On Monday Tony Crescenzi, Miller Tabak & Co chief bond market strategist, spoke with us ahead of the broadcast. We thought you'd be interested in his comments.
--The fed funds futures market is priced for the Fed to deliver its first rate hike by the September 16th FOMC meeting, which explains why the 2-year has been trading close to a percentage point over the funds rate, since 2s tend to trade at such a wide spread when a hike is around the bend.
--I personally do not agree with the expectation, since I believe that the Fed’s concerns about the financial system and economic risks outweigh its concerns about inflation risks. I therefore believe that the recent rate rise has been excessive.
--Nevertheless, I do agree with the idea that rate increases are more likely than rate cuts, which means that the 2-year should trade at a yield of at least 2.625% to 2.75%, leaving little room for a rally in Treasury prices. In other words, while yields are not likely to climb much in the near-term, they probably won’t fall much either.
--Through it all, the general thrust in rates is therefore likely to be up from here and should be especially true when the 2009 economic recovery rolls around. Once the downward pressure on rates from cyclical forces is reduced, the upward pressure from secular forces such as the strength of the global economy will exert itself a bit more.
--I believe that for many reasons a recovery in 2009 is highly likely, not the least of which is the mood shift that is likely to occur when Americans pick a new president. After a presidential election Americans tend to look ahead and confidence gains.