Interest Rate traders finally agree with Bond traders and everyone sells

This weeks update is co-authored with Hui Si Tan (Data Analyst).

Bond traders had the foresight

This has been an interesting story to watch as events unfolded.

• In our update on 21st June we had seen that while interest rates had spiked following Fed’s announcement (of moving up their interest rate hike schedule), investors had taken a wait and watch stance.
• In a subsequent update on 26th July we had seen a divergence. While Bond traders had started selling from the next week, the Interest Rate Swap traders were not so convinced and had pushed 5 year swap rates (which predict average LIBOR/SOFR for that time period) back to where they were before the Fed announcement. Typically interest rates go up when people are selling bonds.
• Last few weeks have seen an alignment. Interest Rate Swap traders have been moving interest rates higher, while Bond Traders have increased their selling (i.e. both of them are positioning for higher rates). This was further reinforced by a lot of taper talk this week as minutes from the June Fed meeting were released.

You can see all 3 episodes of this ‘Netflix drama’ in the chart below

Interest Rates are at an important level

Markets have a tendency to follow the Fibonacci Retracement Levels. The current 5 year rate of is around the 38.2% retracement of the interest rate fall during Covid (see chart below). Interest rates levels have ‘hop skotched’ around this level 5 times in the last 6 weeks.

As per the latest filings, a hedge fund run by Michael Burry (of The Big Short fame) has also taken a huge bet that long term interest rates will rise

All eyes on the Fed meeting next Sunday

With the recent release of the minutes from July’s Fed meeting indicated that members are on board with tapering, all eyes are now on the Jackson Hole Summit. There is a general expectation that the taper will continue. It begets the question if the 5-year interest swap rate will break the resistance level after the Jackson Hole Summit.

Another bad week for HKD equities

Following the crackdowns by the Chinese government, investors have a bearish sentiment of the HKD denominated market. Financial stocks have fallen out of favor with the investors while Communications is a strong contender for being Investors’ hot pick. Some signs of recovery last week have gone away this week.

Conclusion (tl;dr)

• Bond sell off rally continues for the 7th week
• Quantitative tightening (tapering) is on the table for the Fed, waiting for the Jackson Hole Summit for more news
• Effects of the Chinese government crack down is still prominent

Please note that this newsletter is just a data analysis of actual investor behavior and does not constitute investment advice in any form. Click here to subscribe to our mailing list