Did you hear the one about the Fed preventing bubbles?

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Generally, the Fed has a dual mandate: to promote maximum employment and keep a handle on inflation. Yellen herself has dedicated many speeches to the topic of employment. She has also always been very supportive of Bernanke’s push for increased transparency at the Fed, so we expect that trend to continue.

With Richard Fisher from Dallas and Charles Plosser of Philadelphia, the Fed has equipped a couple of vocal hawks with voting rights. However, President Obama’s recent nominations, including Stanley Fisher (Vice Chairman), along with Lael Brainard and Jerome Powell are believed to be doves.

The Federal Funds Target Rate (white line) has been pegged at 0.25% for the past five years. The 10-year note yield has also been steadily declining (pink line), reaching a low of 1.379% in July 2012. As the Fed began to hint at the possibility of tapering, the 10-year note yield reacted and began to rise in the spring of 2013. Ultimately, the pace of our ongoing economic recovery will dictate how soon the Fed will actually begin to raise rates. But, as mentioned before, based on the Fed’s own forecasts, tightening is expected to start in mid-2015.

Given this expectation, a good way to play this would be through the use of a spread, shorting the further out Eurodollar interest rate, March 2017, and going long the nearer-term March 2015 Eurodollar (see chart below).

Spread Chart: Long March 15’ Eurodollar/Short March 17’ Eurodollar

The long leg will serve as a safety net on a rally in nearby futures if yields actually drop. The current spread is near 2.00 full points and as rates start to move higher, we expect to see this spread trade near 3.00, which would represent a gain of $2,500. There is strong support at 1.60, which is where we would place our stop, so this position would have a 2:1 risk/reward ratio. 

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About the Author
Greg Adamsick

 

Greg Adamsick, Vice President of Global Futures & Options at RCM Asset Management, helps clients seize opportunities in the futures and options markets and satisfy portfolio needs. His passion for the markets was born on the CBOT and CME trading floors over 20 years ago. Relying on a combination of technical and fundamental indicators, Greg has developed a unique global macro perspective that helps him identify points of change in the markets. Greg Adamsick can be reached at gadamsick@rcmam.com.      

 

TRADING FUTURES, OPTIONS ON FUTURES AND RETAIL OFF-EXCHANGE FOREIGN CURRENCY TRANSACTIONS INVOLVES SUBSTANTIAL RISK OF LOSS AND IS NOT SUITABLE FOR ALL INVESTORS. YOU SHOULD CAREFULLY CONSIDER WHETHER TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES, KNOWLEDGE AND FINANCIAL RESOURCES. YOU MAY LOSE ALL OR MORE THAN YOUR INITIAL INVESTMENT. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.


About the Author
Matthew Bradbard

Vice President of Managed Futures & Alternatives at RCM Asset Management, brings hands-on analysis and trading experience to RCM Asset Management clients. Mr. Bradbard has been creating and executing trading strategies for over 10 years, and he is a respected commentator on a number of futures and options markets. Mr. Bradbard regularly publishes market commentary and trading ideas, and he is frequently cited in articles covering the futures and options space, and the role played by commodities in a diversified portfolio.

Trading futures, options on futures and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge and financial resources. You may lose all or more than your initial investment. Past performance is not necessarily indicative of future results.

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