Investors are dumping 10y-30y Treasuries which is steepening the yield curve. The 2y-10y yield spread broke out last week, Gold/USD is decoupling and commodities and equities have been rallying hard. Is the reflation trade well underway or is it getting ahead of itself. Or is this just a technical short covering massacre? GM is expected to file for Chapter 11 tomorrow and the E-mini S&P overnight future is up 1.5% testing ceiling resistance and the 200 day moving average. $SPY pierced the 200 day moving average on Friday.
So will Bernanke have to put his foot on the break and raise rates 25-50 basis points? We are at 0.25% right now. Here are charts of the June and August Fed Funds futures as well as a look at the futures curve which is in backwardization. May 2009 Fed Funds future = 99.82 and Dec 2009 Fed Funds future = 99.69. Looking at the Fed Funds futures options, premium is still heavily weighted toward calls. The May call/put ratio is 72.98, June call/put ratio 33.70, July call/put ratio 13.75, Aug call/put ratio 8.04, Sept call/put ratio 8.4, Oct call/put ratio 5.69.
Bull sentiment seems to taper off toward the end of October and the Oct future is -0.06 from May. The odds are definitely in favor of higher rates/lower prices going forward, however the question is when to pull the trigger in the pit (1 mos, 3 mos, 6 mos, year??).
Fed Funds Sept Future (Barchart.com)
Fed Fund Futures Backwardization (Barchart.com)
