HEDGEFUNDIE's excellent adventure: Federal Funds Rate side discussion

[skierincolorado]

Moved into a new thread from: HEDGEFUNDIE's excellent adventure Part II: The next journey --admin LadyGeek]

I lost track what you are actually arguing.

The original conversation was, when the FFR hits 5% where would the 20Y be. My view is that the 20Y would at least be 4.5%.

The FFR just hit 5%. The 20y actually went down since you made that post and is at 3.8% today. Aggressive FFR rate increases have the opposite effect on long term yields. Aggressive rate increases control inflation and bring down long term rates. Slow dovish rate increases that fail to control inflation lead to long term bond yields going up.

[Marseille07]

The FFR just hit 5%. The 20y actually went down since you made that post and is at 3.8% today. Aggressive FFR rate increases have the opposite effect on long term yields. Aggressive rate increases control inflation and bring down long term rates. Slow dovish rate increases that fail to control inflation lead to long term bond yields going up.

Sure. We're no longer inflating at 9%. Lots of things changed.

[skierincolorado]

The FFR just hit 5%. The 20y actually went down since you made that post and is at 3.8% today. Aggressive FFR rate increases have the opposite effect on long term yields. Aggressive rate increases control inflation and bring down long term rates. Slow dovish rate increases that fail to control inflation lead to long term bond yields going up.

Sure. We're no longer inflating at 9%. Lots of things changed.

Which the market was already predicting back in November. The market is forward looking. Expecting long term yields to go up simply because the FFR was likely to go up never made sense.

[Marseille07]

Which the market was already predicting back in November. The market is forward looking. Expecting long term yields to go up simply because the FFR was likely to go up never made sense.

I don't agree that the market was predicting back in November, but let's agree to disagree.

[skierincolorado]

Which the market was already predicting back in November. The market is forward looking. Expecting long term yields to go up simply because the FFR was likely to go up never made sense.

I don't agree that the market was predicting back in November, but let's agree to disagree.

It is a simple statement of fact. Inflation swap contracts in Nobember were priced for inflation to come down quickly. Predicting long yields to go up just because the FFR was likely to go up never made any sense. Long yields are forward looking and already had priced in the FFR reaching 5% in the short term. They had also priced in inflation coming down and the FFR coming back down. Understanding this is important because otherwise you have a false perception that market timing is likely to succeed.

[Marseille07]

It is a simple statement of fact. Inflation swap contracts in Nobember were priced for inflation to come down quickly. Predicting long yields to go up just because the FFR was likely to go up never made any sense. Long yields are forward looking and already had priced in the FFR reaching 5% in the short term. They had also priced in inflation coming down and the FFR coming back down. Understanding this is important because otherwise you have a false perception that market timing is likely to succeed.

No, it isn't a simple statement of fact. The 10Y hit 4%. You're just looking at things that fit your narrative and ignoring ones that didn't.

[skierincolorado]

It is a simple statement of fact. Inflation swap contracts in Nobember were priced for inflation to come down quickly. Predicting long yields to go up just because the FFR was likely to go up never made any sense. Long yields are forward looking and already had priced in the FFR reaching 5% in the short term. They had also priced in inflation coming down and the FFR coming back down. Understanding this is important because otherwise you have a false perception that market timing is likely to succeed.

No, it isn't a simple statement of fact. The 10Y hit 4%. You're just looking at things that fit your narrative and ignoring ones that didn't.

It is a simple statement of fact that the market expected inflation to come down. This is indisputable. Look at inflation swap contracts and TIP breakevens in November. Predicting long term yields to go up because the FFR was likely to go up never made any sense. The market was already predicting inflation to come down and for the yield curve to become very inverted. These are simple statements of fact based on the structure of the yield curve in November.

[Marseille07]

It is a simple statement of fact that the market expected inflation to come down. This is indisputable. Look at inflation swap contracts and TIP breakevens in November. Predicting long term yields to go up because the FFR was likely to go up never made any sense. The market was already predicting inflation to come down and for the yield curve to become very inverted. These are simple statements of fact based on the structure of the yield curve in November.

No, no one disputes that inflation would eventually come down. I never said inflation would stay at 9% forever, either. The point is that 10Y still hit 4%.

[skierincolorado]

It is a simple statement of fact that the market expected inflation to come down. This is indisputable. Look at inflation swap contracts and TIP breakevens in November. Predicting long term yields to go up because the FFR was likely to go up never made any sense. The market was already predicting inflation to come down and for the yield curve to become very inverted. These are simple statements of fact based on the structure of the yield curve in November.

No, no one disputes that inflation would eventually come down. I never said inflation would stay at 9% forever, either. The point is that 10Y still hit 4%.

The point is that predicting long term rates would go up because the FFR was likely to increase never made any sense. The FFR went up a lot, and long term rates went down. Because inflation came down - as expected.

[Marseille07]

The point is that predicting long term rates would go up because the FFR was likely to increase never made any sense. The FFR went up a lot, and long term rates went down. Because inflation came down - as expected.

My call was 10Y hitting 4% by EOY 2022 which happened.

You're trying to pick on my opinion I mentioned separately. FFR 5% and 20Y 4.5% at the same time is a much difficult combination to call. And I didn't make such a call, I only offered my opinion. But let me show you that the 20Y did hit 4.54% last October:

[skierincolorado]

The point is that predicting long term rates would go up because the FFR was likely to increase never made any sense. The FFR went up a lot, and long term rates went down. Because inflation came down - as expected.

My call was 10Y hitting 4% by EOY 2022 which happened.

You're trying to pick on my opinion I mentioned separately. FFR 5% and 20Y 4.5% at the same time is a much difficult combination to call. And I didn't make such a call, I only offered my opinion. But let me show you that the 20Y did hit 4.54% last October:

It's not a difficult prediction. Anybody can make stuff up. What's problematic is making stuff up based on the flawed reasoning that long term yields will go up because of expected FFR hikes. A broken clock is right twice a day.


The idea that long yields will go up because the FFR is likely to go up is deeply flawed. This is evidenced by the fact that they have broadly moved in opposite directions over the last 6 months since you made the statement. You can't predict what bond yields will do at all based off of where the FFR is heading. If you don't want my help that's fine, but I'm going to correct misleading market predictions so that others are not misled by them. If someone had waited for long term yields to rise with the FFR based on your repeated misleading statements to that effect, they would be in a worse place today. If you want to make market predictions I'd suggest posting them on a different forum where you won't be corrected on the impossibility of such simplistic predictions.

Just so everyone is clear: don't try to time the bond market based off how the FFR is moving (or for any other reason for that matter).

[Marseille07]

It's not a difficult prediction. Anybody can make stuff up. What's problematic is making stuff up based on the flawed reasoning that long term yields will go up because of expected FFR hikes. A broken clock is right twice a day.

If you don't see correlation then I am not sure what to tell you. It's not a 1.00 correlation but definitely seems like in the positive territory, at least to me.

Besides, FFR 5% and 20Y 4.5% not happening at the same time says nothing about the general trend of FFR and 20Y. My offered opinion doesn't represent every bond prediction in the universe. I wish if it did. The angle you come from is just...bizarre.

[comeinvest]

If you don't see correlation then I am not sure what to tell you.

The causality is the opposite, though. The chart is the result of delayed causality.

[Marseille07]

The causality is the opposite, though. The chart is the result of delayed causality.

Which timeframe are you talking about? 2020 is a tricky one because the Fed cut the rates in response to the pandemic, and it appears the yield went up before the hikes started. But we still see a positive correlation at the end of the day.

[comeinvest]

The causality is the opposite, though. The chart is the result of delayed causality.

Which timeframe are you talking about? 2020 is a tricky one because the Fed cut the rates in response to the pandemic, and it appears the yield went up before the hikes started. But we still see a positive correlation at the end of the day.

In science, it's easy to mistakenly imply causality from correlation. I think we all know the effects after reading this thread. Inflation up causes FFR up; inflation down causes FFR down. FFR up causes inflation down, with a delay, which has the effect of lower inflation expectations and therefore long-term rates lower. As a result of these two, FFR up sooner eventually causes FFR lower down the line.

[Marseille07]

In science, it's easy to mistakenly imply causality from correlation. I think we all know the effects after reading this thread. Inflation up causes rates up. Rates up causes inflation down, with a delay. As a result of these two, rates up sooner eventually causes rates lower down the line.

I never disagreed the sequence of events you're describing. Of course, there were questions of how high the FFR needs to be and how stubborn inflation would be. But there's no question inflation happened first then the FFR rose.

[skierincolorado]

It's not a difficult prediction. Anybody can make stuff up. What's problematic is making stuff up based on the flawed reasoning that long term yields will go up because of expected FFR hikes. A broken clock is right twice a day.

If you don't see correlation then I am not sure what to tell you. It's not a 1.00 correlation but definitely seems like in the positive territory, at least to me.

Besides, FFR 5% and 20Y 4.5% not happening at the same time says nothing about the general trend of FFR and 20Y. My offered opinion doesn't represent every bond prediction in the universe. I wish if it did. The angle you come from is just...bizarre.

As comeinvest said, correlation is not causality. Inflation is what drives this chart. Inflation was expected to decline in November due to the planned FFR increases. Therefore it should not be expected that long term rates will go up. They might, if the FFR hikes did not have the expected/intended affect on inflation. Or long rates could go down if the FFR hikes were more effective than expected/intended (recession). Or the FFR hikes could have approximately the expected/intended affect, in which case long yields would not change. What has transpired since November is between the 2nd and 3rd scenario. The FFR hikes are having the expected/intended affect on inflation, or slightly more effective than expected, and therefore long term yields have come down.

[Marseille07]

The disconnect here is that the 20Y already hit 4.5% before I wrote that post. I must have forgotten to check that, as it reads like the 20Y hadn't hit 4.5% yet. My post became moot, since there was no need to discuss the FFR with regard to 20Y hitting 4.5% as it had already happened.

[skierincolorado]

The disconnect here is that the 20Y already hit 4.5% before I wrote that post. I must have forgotten to check that, as it reads like the 20Y hadn't hit 4.5% yet. My post became moot, since there was no need to discuss the FFR with regard to 20Y hitting 4.5% as it had already happened.

So you're telling me I can predict that 30y rates will hit 2.5% sometimes in the future and then say my post was "moot" because it already happened in the past? What kind of warpage of the space time continuum is this?

You are so focused on whether your "call" was right you are missing the bigger picture. Your reasoning is the problem. Your reasoning was that because the FFR was going to go up, longer rates would too. This reasoning is flawed. Higher FFR brings inflation under control which ultimately should bring longer yields down (or stay the same since that reasoning is already priced in). Not go up. The reason that FFR and longer rates appear correlated is unexpected inflation drives both the FFR and longer yields higher. There is a correlation but no causation. Unless you have a crystal ball to predict inflation better than the market, you can't predict bond yields.

When the 20y hit 4.5%, the FFR was 3%. Now that the FFR is 5%, the 20y is down to 3.8%.

The idea that expected changes to the FFR will lead to similar changes in bond yields is a big problem. Lots of people had the false perception that because the FFR was heading higher so would longer dated bond yields. People put off bond purchases and stayed in cash potentially missing out on 100s of thousands of dollars of lost interest in a failed market timing attempt. This market timing nonsense based on oversimplifications of how the bond market works needs to stop and never come back.

[Marseille07]

So you're telling me I can predict that 30y rates will hit 2.5% sometimes in the future and then say my post was "moot" because it already happened in the past? What kind of warpage of the space time continuum is this?

I'm not telling you anything.

I mentioned my post was actually moot, without realizing it myself. "When FFR hits 5%, 20Y hits 4.5%" was my opinion offered at that time; but the truth was that the 20Y had already hit 4.5% when the FFR was 4%. So my opinion was actually a moot point, since FFR didn't need to hit 5% for 20Y to hit 4.5%. Your picking on my opinion is also moot for the same reason.

[skierincolorado]

So you're telling me I can predict that 30y rates will hit 2.5% sometimes in the future and then say my post was "moot" because it already happened in the past? What kind of warpage of the space time continuum is this?

I'm not telling you anything.

I mentioned my post was actually moot, without realizing it myself. "When FFR hits 5%, 20Y hits 4.5%" was my opinion offered at that time; but the truth was that the 20Y had already hit 4.5% when the FFR was 4%. So my opinion was actually a moot point, since FFR didn't need to hit 5% for 20Y to hit 4.5%. Your picking on my opinion is also moot for the same reason.

I'm not picking on you or your opinion and sorry if you feel that way. I'm saying your reasoning was incorrect. Also the FFR was 3% not 4% when the 20y hit 4.5%. Of course the FFR didn't need to hit 5% for the 20y to hit 4.5%, since the FFR has nothing to do with the 20y.

[Marseille07]

I'm not picking on you or your opinion and sorry if you feel that way. I'm saying your reasoning was incorrect. Also the FFR was 3% not 4% when the 20y hit 4.5%.

You are picking on my opinion. You started talking about this as soon as the FOMC raised the FFR to 5% and dug up my post since last November.

My reasoning is not incorrect, at least you aren't making a strong case when we both agree that the 20Y had hit 4.5% even before the FFR hit 5%. "20Y is 3.8% when the FFR is 5%" is a moot point when the 20Y had hit 4.5% much much earlier.

[skierincolorado]

I'm not picking on you or your opinion and sorry if you feel that way. I'm saying your reasoning was incorrect. Also the FFR was 3% not 4% when the 20y hit 4.5%.

You are picking on my opinion. You started talking about this as soon as the FOMC raised the FFR to 5% and dug up my post since last November.

My reasoning is not incorrect, at least you aren't making a strong case when we both agree that the 20Y had hit 4.5% even before the FFR hit 5%. "20Y is 3.8% when the FFR is 5%" is a moot point when the 20Y had hit 4.5% much much earlier.

The problem is the incorrect reasoning that you presented at the time and just presented again a few posts ago. The expected rise in the FFR did not and should not have been expected to cause longer bond yields to rise. Saying that in briefly hit it at some point prior to your prediction doesn't make this false logic any better and comes across as a silly attempt to make your incorrect prediction correct (and lets be honest you said the 20y would rise to 4.5% when the FFR was 5%, which it wasn't, the 20y went down instead. Saying that it's moot becauase the 20y hit 4.5% some time before your prediction seems quite silly). Which isn't even the point - the point is the flawed logic.

[Marseille07]

The problem is the incorrect reasoning that you presented at the time and just presented again a few posts ago. The expected rise in the FFR did not and should not have been expected to cause longer bond yields to rise. Saying that in briefly hit it at some point prior to your prediction doesn't make this false logic any better and comes across as a silly attempt to make your incorrect prediction correct.

It's not incorrect reasoning. The correlation is clearly positive, not 0 or negative. If you don't understand correlation that's fine, but please don't incorrectly call others incorrect.

[skierincolorado]

The problem is the incorrect reasoning that you presented at the time and just presented again a few posts ago. The expected rise in the FFR did not and should not have been expected to cause longer bond yields to rise. Saying that in briefly hit it at some point prior to your prediction doesn't make this false logic any better and comes across as a silly attempt to make your incorrect prediction correct.

It's not incorrect reasoning. The correlation is clearly positive, not 0 or negative. If you don't understand correlation that's fine, but please don't incorrectly call others incorrect.

Correlation does not mean causation. Your posts on this matter have inferred a causation which does not exist. The correlation is often negative. The correlation was negative over the last 6 months and has frequently been negative in the past. Over longer time scales there appears a positive correlation because of a 3rd factor - inflation.

[Marseille07]

Correlation does not mean causation. Your posts on this matter have inferred a causation which does not exist. The correlation is often negative. The correlation was negative over the last 6 months and has frequently been negative in the past. Over longer time scales there appears a positive correlation because of a 3rd factor - inflation.

Oh wow. So you are nitpicking so much that you think I only discussed FFR and 20Y in a vacuum, never mind I never thought about inflation since it is a 3rd factor.

Don't be ridiculous. Inflation was clearly in the picture when I made all those posts.

[skierincolorado]

The original conversation was, when the FFR hits 5% where would the 20Y be. My view is that the 20Y would at least be 4.5%.

You said "where the 20y will be when the FFR hits 5%". Not that the 20y would hit 4.5% 6 months earlier (and before you even made the prediction) when the FFR was only 3%. Claiming its "moot" because at some point in the past long before the FFR hit 5% and before you even made the prediction is nonsensical and just demonstrates the fact that increases in the FFR do not cause long bond yields to go up as you have frequently misled others on this forum.

These market timing posts based on basic logical fallacies need to stop. They incur real losses and risks.

[Marseille07]

You said "where the 20y will be when the FFR hits 5%". Not that the 20y would hit 4.5% 6 months earlier (and before you even made the prediction) when the FFR was only 3%. Claiming its "moot" because at some point in the past long before the FFR hit 5% and before you even made the prediction is nonsensical and just demonstrates the fact that increases in the FFR do not cause long bond yields to go up as you have frequently misled others on this forum.

These market timing posts bases on basic logical fallacies need to stop.

I already clarified the context many times, no need to keep repeating. Although I understand you don't have much else to attack.

[comeinvest]

Perhaps he was just referring to correlation, not causation. There is some potential causation effect too, because of the expectations hypothesis, as well as the possibility of yield curve control or reversal from it, that might accompany FFR rate decisions.

[Marseille07]

Perhaps he was just referring to correlation, not causation. There is some potential causation effect too, because of the expectations hypothesis, as well as the possibility of yield curve control or lack of it.

They move in tandem, but the above poster was making an ill-conceived argument where their sole point is that I ignored inflation as a 3rd factor when discussing FFR and 20Y. Since I didn't ignore inflation, they aren't making a sound argument.

[skierincolorado]

Perhaps he was just referring to correlation, not causation. There is some potential causation effect too, because of the expectations hypothesis, as well as the possibility of yield curve control or reversal from it, that might accompany FFR rate decisions.

Then why would one predict that when FFR hit 5% the 20% would be "at least 4.5%" without any other explanation? At the time it was known the FFR would very likely hit 5%. It was obviously the same oversimplified argument he and others have made that known future FFR rate increases will increase long bond rates. He even told people that if you compared before and after FFR rate increases we would see the 20y yield be higher.

[Marseille07]

Then why would one predict that when FFR hit 5% the 20% would be "at least 4.5%" without any other explanation?

FFR hitting 5% incorporates the idea of inflation. You are being ridiculous if you think I thought the Fed is hiking the FFR without inflation.

[skierincolorado]

Then why would one predict that when FFR hit 5% the 20% would be "at least 4.5%" without any other explanation?

FFR hitting 5% incorporates the idea of inflation. You are being ridiculous if you think I thought the Fed is hiking the FFR without inflation.

The inflation was also already known and priced in. Which is why long bond yields did not go up despite inflation that has been in line with what the market was predicting.

[Marseille07]

The inflation was also already known and priced in.

The yield curve was rising as investors price in inflation. I don't understand how any of this is contradictory.

[skierincolorado]

The inflation was also already known and priced in.

The yield curve was rising as investors price in inflation. I don't understand how any of this is contradictory.

Investors had already priced in inflation.

[Marseille07]

Investors had already priced in inflation.

My take is somewhat different, but it is futile to continue arguing on this point. Let's end it.

I agree that investors price in *some* inflation, the difference in opinions is by how much.

[skierincolorado]

Investors had already priced in inflation.

My take is somewhat different, but it is futile to continue arguing on this point. Let's end it.

I agree that investors price in *some* inflation, the difference is by how much.

What has actually happened between November and now yet again demonstrates that the market is efficient and that market timing predictions such as yours do not have skill and can lead to unnecessary risk of loss for investors if followed. The market had priced in inflation. Which is why despite inflation and FFR rate increases continuing, long bond yields did not change much and instead decreased slightly. Presumably this is because the market now expects slightly less than the very high amount of inflation the market had already priced in. The market had priced in something around 5% inflation for 2023. The data demonstrates this in inflation swap contracts and TIPS breakevens.

[Marseille07]

What has actually happened between November and now yet again demonstrates that the market is efficient and that market timing predictions such as yours do not have skill and can lead to unnecessary risk of loss for investors if followed. The market had priced in inflation. Which is why despite inflation and FFR rate increases continuing, long bond yields did not change much and instead decreased slightly. Presumably this is because the market now expects slightly less than the very high amount of inflation the market had already priced in. The market had priced in something around 5% inflation for 2023.

As I said, I already explained the context many times:
a) it wasn't a prediction, just an opinion
b) it was a moot comment because I wouldn't have made that comment had I known the 20Y had already hit 4.5%.

You're trying to create a strawman attack, but you can't keep mischaracterising my posts.

[skierincolorado]

What has actually happened between November and now yet again demonstrates that the market is efficient and that market timing predictions such as yours do not have skill and can lead to unnecessary risk of loss for investors if followed. The market had priced in inflation. Which is why despite inflation and FFR rate increases continuing, long bond yields did not change much and instead decreased slightly. Presumably this is because the market now expects slightly less than the very high amount of inflation the market had already priced in. The market had priced in something around 5% inflation for 2023.

As I said, I already explained the context many times:
a) it wasn't a prediction, just an opinion
b) it was a moot comment because I wouldn't have made that comment had I known the 20Y had already hit 4.5%.

You're trying to create a strawman attack, but you can't keep mischaracterising my posts.

It doesn't matter what you call it. The reasoning that FFR rate increases will lead to long bond yields going up is flawed.

[Marseille07]

It doesn't matter what you call it. The reasoning that FFR rate increases cause long bonds to go up is flawed.

It's not flawed because FFR rate increases are in response to inflation. I don't think you understand what you're writing.

[skierincolorado]

It doesn't matter what you call it. The reasoning that FFR rate increases cause long bonds to go up is flawed.

It's not flawed because FFR rate increases are in response to inflation. I don't think you understand what you're writing.

And the inflation which the planned FFR rate increases were in response to was already priced into long bond yields. We've continued to have high inflation and yet long bond yields have gone down very slightly. Because the high inflation was already priced in.

[Marseille07]

And the inflation which the planned FFR rate increases were in response to was already priced into long bond yields.

Which resulted in the 20Y hitting 4.5% last October. None of this should be contentious.

[skierincolorado]

And the inflation which the planned FFR rate increases were in response to was already priced into long bond yields.

Which resulted in the 20Y hitting 4.5% last October. None of this should be contentious.

Yes high inflation expectations in early October caused long bond yields to go up. Not the FFR rate increases. In fact, the FFR was only 3% at the time. FFR is much higher today and inflation is still high. And yet bond yields are lower. Suggesting that long bond yields would go up due to planned FFR rate increases is not sound reasoning.

[Marseille07]

Yes high inflation expectations in October caused long bond yields to go up. Not the FFR rate increases. In fact, the FFR was only 3% at the time. FFR is much higher today and inflation is still high. And yet bond yields are lower.

As I said, I wouldn't have made that 5% FFR comment had I known the 20Y already hit 4.5% when FFR was 3%. While I should have checked the data, you are being ridiculous to keep attacking a moot comment.

[skierincolorado]

Yes high inflation expectations in October caused long bond yields to go up. Not the FFR rate increases. In fact, the FFR was only 3% at the time. FFR is much higher today and inflation is still high. And yet bond yields are lower.

As I said, I wouldn't have made that 5% FFR comment had I known the 20Y already hit 4.5% when FFR was 3%. While I should have checked the data, you are being ridiculous to keep attacking a moot comment.

The fact that it had already "hit" it some time in the past is irrelevant. It is the reasoning for your "call" that is flawed.

[Marseille07]

The fact that it had already "hit" it some time in the past is irrelevant. It is the reasoning for your "call" that is flawed.

Then stop referring to my comment as evidence to say market timing is impossible or w/e.

Also, reasoning is not flawed as we already discussed many times. Inflation was considered.

[skierincolorado]

The fact that it had already "hit" it some time in the past is irrelevant. It is the reasoning for your "call" that is flawed.

Then stop referring to my comment as evidence to say market timing is impossible or w/e.

Also, reasoning is not flawed as we already discussed many times. Inflation was considered.

If you considered that the market had already priced in a large amount of inflation, why did you suggest that bond yields would go up dramatically between November and today?

[Marseille07]

If you considered that the market had already priced in a large amount of inflation, why did you suggest that bond yields would go up dramatically between November and today?

As I said, it was written without knowing the 20Y had already hit 4.5%. I wouldn't have written it had I known that, as it doesn't make sense to discuss 5% FFR when 3% FFR already did the job.

[skierincolorado]

If you considered that the market had already priced in a large amount of inflation, why did you suggest that bond yields would go up dramatically between November and today?

As I said, it was written without knowing the 20Y had already hit 4.5%. I wouldn't have written it had I known that, as it doesn't make sense to discuss 5% FFR when 3% FFR already did the job.

The FFR didn't do the job. Inflation did the job.

[Marseille07]

The FFR didn't do the job. Inflation did the job.

How many rounds of the same thing do we have to go over? FFR is raised in response to inflation. This point has already been covered multiple times.