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Extra! Extra! Headline Moves Market!

by Frank Kaberna| Tips & Strategies

Last week, Federal Reserve Chairman Jerome Powell said he would not “even think about” lifting interest rates off their current 0-0.25% level as the US economy continues to work through the pandemic.*

But, like, what does that even mean for markets and the everyday trader?

The Short-Term Reaction

Treasuries, which are some of the most commonly traded interest rate products in the US, saw their yields fall in the immediate wake of Powell’s speech. But it’s important to distinguish the Fed funds rate – a very short-term yield benchmark controlled by the Fed – from the yields traded in Treasury bills, notes, and bonds that are traded in the market.

While Small Treasury Yield (S10Y) futures fell as traders attempted to bring 10YR rates closer to the 0% reflected in that of the Fed funds, the market bounced back in the days following to make new highs on the year.

The Long-Term Opportunity

People often read headlines and respond with knee-jerk trades that might not make sense in the long term. At the end of the day, the Fed does not control Treasury yields, its influence is very slight especially as you add duration to the product, and the guy basically said he wasn’t going to change anything. So.. why did S10Y fall?

Sensational headlines and quotes will always create short-term volatility in markets, but some of the best opportunities can be found in analyzing whether those words actually mean anything for markets in the long term.

More interesting still is the fact that 10YR rates are actually lower than average given a Fed funds rate of 0-0.25%!** Who knows where S10Y futures are headed next? The only thing that’s certain: markets will move where they want regardless of some one-off headline.

Does the Fed Really Matter? (Small Treasury Yield \ S10Y)

Source: dxFeed Index Services (https://indexit.dxfeed.com)

*Fed’s Powell Signals Easy Money Policies to Remain in Place for a While from Wall Street Journal (https://wsj.com)
**Data from 1990 to present (https:/treasury.gov)

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© 2021 Small Exchange, Inc. All rights reserved. Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information in this advertisement is current as of the date noted, is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Trading futures involves the risk of loss, including the possibility of loss greater than your initial investment.

 

About Frank Kaberna

Frank Kaberna is the head content strategist at the Small Exchange. He produces everything from brochures to videos that inform on the Small Exchange’s products. After earning a mathematics degree from the University of Michigan, Frank traded interest rates at the Chicago Board of Trade. He then worked on the tastytrade Network as a content producer and on-air talent before landing at the Small Exchange.

Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

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