Dec 27, 2023

Interest Rates Continue to Fall…

And have a LONG way to go from here…

Buy Treasury Bonds

AND

Two Year Treasury Notes  

Back in 2021, when I started buying Eurodollar Puts in anticipation of interest rates heading higher as inflation began its surge to 50 year highs, the Fed spent almost a year sitting on their hands…and were so horrendously dead wrong about what was happening…as to almost be unbelievable. The interest rate markets, however, were way out in front of them, and built in big rate increases long before the Chairman Powell finally admitted the Fed has totally misread inflation, and then instituted their sharp rate raising campaign.

And I believe that is where we are again…that the interest rate markets are once again moving AHEAD of the Fed…but towards sharply lower interest rates…as the Fed continues to wonder whether inflation is being “sticky” before they begin to start easing.

The fact is, both the Consumer Price Index  (CPI) and Producer Price Index (PPI) topped out almost 18 months ago and have basically been heading sharply lower ever since…and as I have been saying since Septemember, 2022, are probably headed towards NEGATIVE year over year percentage levels…which has already become the case in the PPI…and I think is quite possible with the CPI...or at a minimum, that it gets defintively BELOW the Fed’s desired 2% target…

In other words, I THINK THE FED IS MIS-READING INFLATION AGAIN, in that INFLATION IS FALLING MORE SHARPLY THAN THE FED EVER THOUGHT POSSIBLE…And that the next surprise will be Powell saying, “We missed again…Prices are dropping faster than we expected…And we are now need to quickly begin LOWERING interest rates.”

And DO understand, that same as it was back in 2021 when the futures markets raised rates ahead of the Fed, the same thing…in the opposite direction…is happening, and I believe will continue to happen in just about every interest rate contract that we trade…The Bond Market is already almost 20 points of its lows…and STILL moving higher…But what really has my eye right now is the Two Year Note futures contract shown below, which has also been moving up (reflecting lower 2 Year interst rates), but for the reasons outlined below, think it could fairly EXPLODE on the upside from here.

The stats here are truly mindboggling…

To be clear, sooner or later, all of those 1.3 million shorts WILL be exited…that is, BOUGHT BACK…and in numbers that are roughly 10 times as large as they have EVER been…

Here’s the option to buy right now…And I DO think this contract has waded through sellers for the past few months…and is absolutely poised to accelerate from here…

And for a little more perspective, here’s the actual Two Year Note Yield chart…which moves inversely to the futures…That is, when rates are going down, futures are moving up…

Pretty much as it has been forever, the Interest Rate FUTURES markets are moving ahead of the Fed and ahead of the news…And they ARE moving.

If you think this makes sense, I urge you to get on now…NOT after inflation, and interest rates, have fallen even further…and certainly not after the Fed finally wakes up again.

Call if you’re interested.

Looking towards are great 2024…

Thanks,

Bill

770-425-7241

866-578-1001

All option prices in this newsletter include all fees and commissions. All charts, unless otherwise noted, are by Aspen Graphics and CRB.

The author of this piece currently trades for his own account and has a financial interest in the following derivative products mentioned within: Two Year Notes