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Interest rates
Apr. 21st, 2010 02:54 pmA perceptive article by Jennifer Hughes in the FT this morning. Canada's equivalent of the Fed/BoE has for the past year been following the Fed/BoE mantra of keeping rates low for the foreseeable future, for an extended period, until there are strong signs that the recovery is under way, etc etc.
Yesterday the BoC simply removed its "conditional commitment". It didn't say that interest rates would be going up any time soon. It just didn't say that it would be keeping them down.
And that was enough. Within seconds of the statement the market makers had priced in a rise at the next BoC meeting.
The point here, as Hughes points out, is that there is no such thing as a gradual return to a normal interest rate environment. The markets will react the second the Fed/BoE issues a statement that does not include the mantras "extended period" or "at least the medium term".
What does this mean for me an you? Basically, that there could be money to be made betting on interest rate futures, because the spike when it comes will come as a surprise.
It's a semi-classic Taleb position (not "classic" Taleb because it's a little bit too white-swannish) in that you probably have to accept a couple of smallish losses or more before you turn a bigger profit. If interest rates remain at 0.5% for 18 months, you will probably book an overall loss. But it does strike me as a good bet, because I don't think the markets have priced in this volatility (and the volatility is - this is the good news - only in one direction, the direction you want).
++++++++++
RyanAir have not had a good eruption. While EasyJet said that 88% of services were running, RyanAir said that it wouldn't be running anything until 1pm this morning and some services not until 1pm on Friday.
RyanAir has always been shite, but usually the pennypinnchers have been willing to put up with it. Will they be equally sanguine as they see EasyJet customers flying home while they have to spend another one or two nights stranded abroad?
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Yesterday the BoC simply removed its "conditional commitment". It didn't say that interest rates would be going up any time soon. It just didn't say that it would be keeping them down.
And that was enough. Within seconds of the statement the market makers had priced in a rise at the next BoC meeting.
The point here, as Hughes points out, is that there is no such thing as a gradual return to a normal interest rate environment. The markets will react the second the Fed/BoE issues a statement that does not include the mantras "extended period" or "at least the medium term".
What does this mean for me an you? Basically, that there could be money to be made betting on interest rate futures, because the spike when it comes will come as a surprise.
It's a semi-classic Taleb position (not "classic" Taleb because it's a little bit too white-swannish) in that you probably have to accept a couple of smallish losses or more before you turn a bigger profit. If interest rates remain at 0.5% for 18 months, you will probably book an overall loss. But it does strike me as a good bet, because I don't think the markets have priced in this volatility (and the volatility is - this is the good news - only in one direction, the direction you want).
++++++++++
RyanAir have not had a good eruption. While EasyJet said that 88% of services were running, RyanAir said that it wouldn't be running anything until 1pm this morning and some services not until 1pm on Friday.
RyanAir has always been shite, but usually the pennypinnchers have been willing to put up with it. Will they be equally sanguine as they see EasyJet customers flying home while they have to spend another one or two nights stranded abroad?
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