Tuesday, December 15, 2009

The Debts of the Lenders: Yen To Resume Carry Trade Status in 2010

If I had to make a bet (and I am), I would say that the Federal Reserve will raise interest rates sometime in 2010 despite macro-economic slack in jobs and capital lending. The beneficiary of such changes would be the founders of the carry trade, the deflationary demagogues of Asia, the Japanese.

There’s at least an 88 percent chance the U.S. will raise rates in 2010, up from 78 percent on Nov. 24, futures on the CME Group show. Prices indicate a 46 percent likelihood of an increase by June, up from 30 percent on Nov. 30. By contrast, overnight interest-rate swaps traders see no chance that the BOJ will increase its benchmark next year, Bloomberg data show.


Another beneficiary of interest rate uncertainty will be interest rate futures and options on futures powerhouse, CME Group, whose exchange business suffered from quantitative easing this year. A Federal Reserve committed to low interest rates left the trading environment in a monogamous, one way trading environment. With few parties willing to take the other side of the bet, the exchange suffered from lower volume. If the US economy's outlook begins to improve (however skeptical observers may be of the statistics), then policy makers will be pressured to tighten. Moreover, massive budget deficits are attracting the attention of the bond vigilantes who have been quietly sharpening their proverbial knives in expectation of treasury sell-offs from higher supply concerns. This renewed interest in interest rate speculation may prop the firm's fortunes up again.
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