The market is now pricing a real chance the Fed raises rates instead of cutting them.
Everyone keeps talking summer trade and dead volatility. The bond market is telling a very different story underneath.
The 10-year already moved
The 10-year yield sits at 4.569% right now. We sliced straight through 4.5% like a knife through butter. Nobody blinked.
That calm ends soon. The level I am watching next is 4.7%. Cross it and this marketplace gets ugly fast.
Push past 5% and we enter territory we have not touched since 2007. The cost of borrowing is climbing through the roof.
The Fed odds tell the story
I did not plan to cover this. I pulled it up live because the numbers demanded it. Not enough people are looking at this.
Here is what tonight’s video breaks down:
- The July 29th meeting now carries a 31% chance of an actual rate hike.
- September odds of a rate increase have climbed above 70%.
- October is pricing a 75% chance of some form of rate increase.
- The 10-year yield is already sitting at 4.569% and reaching for 4.7%.
The bond market is smart that way. It makes the move before you need it.
Why volatility is the real trade
My associate Jeff Bierman told me today that volatility is dead. I agreed with him about today. The next thirty days look completely different to me.
Forward volatility is already screaming. Vol 40 days out prices 18. September prices 19. October prices 20.
That is deep contango. It signals volatility is set to come roaring back.
So I am staying far away from selling premium into this weekend. I plan to be a net buyer of volatility early next week.
The trades I am tracking
Rotations paid the bills this week. I hit a few clean ones and I walk through them tonight.
- XLF volume exploded from around 50,000 contracts to 135,000 after new weekly expirations got added.
- I am carrying a short position in TLT and it is working as bonds keep getting rocked.
- Next week’s SPX expected move sits at just $90, which I believe is far too cheap.
Next week brings monthly expiration. Earnings season kicks off with the financials. The setup for a volatility spike is loaded.
