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Leveling the Playing Field

January 25, 2016


Snowmeggedon? Icegate? Snowghazi? Im tired of simply adding the ending of other words to make
your word sound clever and significant. Whats next? Oilghazi? Trumpegeddon?

And so.2016.Rategate?

The Feds hike in December is looking more questionable with each market disruption and drop in oil.
We thought the FOMCs forecast of four hikes in 2016 was optimistic, but still felt like two hikes was
reasonable. Markets have backed off expectations to just one hike in 2016 and only a 25% probability of
a hike in March. Just like we felt the market reaction to Decembers FOMC was too aggressive
(expectations jumping from two hikes to four), we feel this recent movement is also too much of a knee
jerk reaction and the likely outcome is still somewhere in between.

The plummet in yields to start the year feels more like a risk off reaction to global market volatility
than a deterioration of domestic data. Short positions continue to suggest considerable bearish
sentiment on Treasurys, particularly in the belly of the curve. If the drop in stocks and commodities
doesnt materially weaken the economy, yields could rebound.

To summarize our highly technical and in-depth analysis - if bad things simply stop happening, the
market may be forced to backtrack and Fed Funds futures/Treasury yields will climb. If the recent news
ultimately turns out to be a disruption rather than a true economic slowdown, the Fed can weather the
storm (get it?) without actually changing policy.

FOMC Meeting Tuesday and Wednesday

Lets be honest, the only thing less likely to happen than a rate hike this week is an African
American winning an Oscar. But the blue dots will be released and should provide some insight
into the FOMCs mentality. A lower trajectory of Fed Funds would suggest a dramatic change
in policy. But we dont think that will happen.
Fed officials have been trying to hold the line at four hikes in 2016 through various public
comments, so we suspect the formal blue dots will still show four hikes this year. The Fed
doesnt want to expend energy in the future reversing the backpedaling from a short-lived
disruption. The statement will likely address the recent market nervousness while suggesting the
Fed still expects data to trend toward normalization.
But if, and this is a big IF, the blue dots show a change in Fed mentality and a slower path for
Fed Funds, all bets are off. That would be tantamount to a Fed admission that it erred in hiking
in December.

The biggest economic data release is Fridays GDP, which is forecasted at just 0.2%. That is
dangerously close to negative territory. This obviously comes after Wednesdays FOMC
statement, but if the FOMC gets a first look at the data it could find its way into the statement.
Expect another volatile week for interest rates as Fed Funds futures take cues from stocks/oil.

Ice storms may not be conducive to office work, but they can teach an old dog like me the meaning of
the phrase binge-watching. I wish I could say I watched Making a Murderer over the course of two
weeks, but with everything canceled this weekend I couldnt turn the darn thing off on Saturday. Kids,
make yourself lunch because Im busy figuring out if this guy was framed.

On a technical note, we have revamped our website to start 2016. This wasnt your typical lets put
lipstick on a pig kind of change. We fundamentally changed the intent of the website
( Our landing page is now comprised of Treasury yields, swap rates, caps,
LIBOR, current forward curve, and economic releases for the week.

If you are reading this newsletter, you already know who Pensford is and what we are about so we
decided to change our format. We thought it would make sense to make it easier for you to access this
market information, rather than the typical website fluff that you dont need.

Our rate feeds update every 15 minutes, while the caps and forward curves are updated once a week.
All the usual caveats that these are meant to provide good estimates, not precise live levels for your
customized structure so dont trade off these numbers! But if you just need a quick look at where
things stand, we want Pensford to be your starting point.

We also worked hard to make it mobile-friendly. I am on the road constantly and wanted a spot where I
could easily check rates between meetings. I suspect many of you can relate to that. I saved the
website as a bookmark on my phone so that I can check rate movements quickly as I am running around.

We also tried to make our calculators easier to use. For a few years now we have had three calculators:
1. Defeasance 2. Refinance Analysis and 3. Yield maintenance. They were, admittedly, a bit tough to find
on the website and most clients didnt realize we had them. We have tried to make it easier for you to
access those and quickly get the information you need.

We want to be your go-to source for interest rates. We hope the new website will give you one place to
find that information quickly and easily. And with about 1,900 Pensford newsletter subscribers, you are
all beta testers. If you have suggestions or comments, send them over so we can make this format work
best for the people that need it the most.

Generally, this material is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument or as an
official confirmation of any transaction. Your receipt of this material does not create a client relationship with us and we are not acting as fiduciary or advisory
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to change without notice. This material may contain information that is privileged, confidential, legally privileged, and/or exempt from disclosure under applicable
law. Though the information herein may discuss certain legal and tax aspects of financial instruments, Pensford Financial Group, LLC does not provide legal or tax
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