A tactical short in Jan 2019 Fed Fund futures
This outlines a tactical short in Jan 2019 Fed Fund futures given adverse moves over the last few trading days, with the market price at 97.9250 in Asia on Wednesday morning, the market is implying 1.5x hikes between now and the end of 2018. We have gone from warming up to expecting four hikes since 2018 to now expecting only a total of 2.5x for the whole of 2018.
The tactical thesis here is that this has been a overshoot, driven by position clearing out, risks in Europe, EM and the Korean Peninsula, etc...
Management and risk description
The key risks are of course... the storm is still building up and we could have:
- A lot more pain on the position clearing that we’ve been seeing in the Fed Fund futures (i.e. more noise)
- Italy/Spain/Europe risks have a bigger spillover effect into markets
- And of course the biggest risk of them all – the Fed does not hike on Jun 13… which would cause the mother of all expectations to be repriced…
200bps risk with a stop at 98.200 (which would imply 0.40x of a hike for rest of 2018)
Targetting circa. 97.70/75, yet as always with an option to close down the position earlier if we feel the need to.
2-3 weeks (14 days to potential Jun 13 Fed Hike)
Chart: 10-year US benchmark bond