While issues like gold and silver contracts may come to mind during an announcement like this; there is a plethora of interest rate sensitive underlings that are either helped or hurt by these actions.
One of the most popular trades has been the high yield trade; naturally involving the real estate investment trusts (REITS). REITS must, by law, distribute about 90% of their net income as yield to investors. These massive dividends, which can be seen as an extrinsic value difference in the option chain and big gaps/candles on the chart, are then distributed to shareholders. Considering these are rather interest rate sensitive; they can be an indicator for the greater interest rate environment. AGNC rallied over 3% this week to a new all time high and the bond etf TLT got wacked by over 2.3%; closing its candle body nearly on its 150 day moving average and its lower wick near its 200 day moving average.
While the ebb and flow of the bond market may be challenging to understand, especially why anyone would accept such a low yield and high principal risk, it is interesting to look at other yield curves. Below is a chart of the Swiss yield curve against the USA yield curve; one can observe the negative rates in Switzerland (because of the currency peg); so is not only us having to deal with bad rates. While prospects may see dim and challenges seem monumental…there are trading opportunities in the interest rate market around the world, but more importantly it is still morning in America.
Across the pond the FT reported that, “investors in the €1.1tn European money market fund industry are facing losses as big managers prepare to pass on the impact of negative short-term interest rates.” American debt is still considered a staple of safety to the market, even though we are nearly at our fiscal tipping point.
-mail mark@keeneonthemarket.com with questions & comments
