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Market-based Fwd Rates, Etc.?

#1
Following the Jackson Hole conference and a major dose of Fed-speak / Open Mouth Policy, here are the forward rate predictions built into prices and curves at today's close:
Fed funds policy rate (mid):  Sept up to 2.125%,  NEXT Mar-19 up to 2.375%, THEN Sept-19 up to 2.625.  That's it....end of hikes for this cycle!
5yr Treasury note yield five years forward (Q3-2023):  2.91%
5yr TIPs yield five years forward: 0.71%
Treasury/TIPs breakeven inflation expectations:   5yrs: 2%    10yrs: 2.10%     30yrs: 2.12%
 
Those are the forward rate predictions currently built into the curve and prices, values established by current equilibrium prices resulting from the market interactions of all global dollar rate traders, investors and speculators.
 
Aside:  Equity touts will be shouting next week about the Fed Atlanta current Q3 GDP estimate of 4.6%.  BUT the Fed NY model preducts 2.0%, the Blue Chip economists average estimate is about 3.1%, and the ECRI leading indicators growth rate has dropped to zero, suggesting a serious decline in GDP growth in H1-2019. 
 
All of this inspires me to use next week to get fully invested in income CEFs with earned yields in the high 7%'s and 8+%. What do you think?

Regards, 
Kelsey 
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#2
So......

Whatcha going to say if the Fed GDP print is higher than you anticipate.

It's still a systemic win if it comes in anywhere close to the 4.1% not many saw coming.

What if this economy really has been kicked in the $$ and has more than a temporary surge?

Do your positions pay off in those circumstances.
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#3
(09-01-2018, 08:56 PM)maizeman Wrote: So......

Whatcha going to say if the Fed GDP print is higher than you anticipate.

It's still a systemic win if it comes in anywhere close to the 4.1% not many saw coming.

What if this economy really has been kicked in the $$ and has more than a temporary surge?

Do your positions pay off in those circumstances.

Hi.  Obviously the global dollar investor consensus can be wrong, but market narratives that drive forward curves tend to be strong, durable, and don't hang on a single datum like GDP.  One can always consider possibilities like all the Fed officials at Jackson Hole were lying to set a trap for investors OR maybe the economy is running at 5% and an inflation spike is about to cause Fed to hike rates dramatically.  But then one is also obliged to also consider the possibility that GDP will print 0.5% and Fed will have to lower rates rapidly in the Recession of 2019.  But if our investment decisions are driven by fear of outcomes that diverge in the extreme from the always-evolving market narrative, we're most likely to be frozen in our tracks, hiding in money market funds.


If the narrative turns to include a more robust economy and frequent/larger rate hikes, income CEFs will surely roll over and decline in msrket price.  But my positions are reasonably protected from that risk in a number of ways:

1. Market narratives don't change rapidly, and simple chart trends and oscillators like MACDs highlight critical changes.
2. I'm just buying income CEFs, not marrying them or getting a CEF transplant, so --- as with any liquid asset --- if it stops working or starts hurting me or if the market narrative just changes before that happens, I sell them.
3. Finally, when it comes to retirement income assets there is another critical risk that too often goes unmentioned.  If I purchase assets that appear to have attractive earned yields and I'm wrong about rates, I CAN EXIT THE POSITIONS.....but those who DON'T purchase seemingly attractive income assets and are wrong about future rate structures ARE OUT OF LUCK.  Since interest rates trend in long cycles, they may have to accept lower income/cash flows for years -- possibly negatively impacting retirement qualty of life.
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#4
Lies, damn lies and forward rates...
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