MBS Day Ahead: What if 2015 Doesn't Turn Out to be The Big Bounce?

What if it's all not enough--the multiple iterations of QE at home, ongoing QE abroad, ultra low rates for longer than they've ever been ultra low, and a generally consumer-friendly inflation environment, among other things? What if this is not enough to get the engine of global growth firing on all cylinders?  What if early 2015 has just been a pause for reflection and the decades-long bull market in bonds actually gets back on track in the second half of the year?  This is a question that has increasingly been on investors' minds as they ponder the Fed's rate-hike rhetoric. Is 2015 really the best time?

Up until a certain point last year, 2015 did indeed look like the best time.  In fact, on the morning of October 7th, 2014, traders estimated that the Fed Funds Rate would be all the way up at 0.78 by January 2016. One week later, the average guess was closer to 0.4, even if only briefly. While Fed Funds Futures bounced back toward a more hawkish stance (expecting higher rates) temporarily, that week marked a shift away from 2015 being the universally agreed-upon time for a rate hike. 

In the following chart of Fed Funds Futures, prices range from 99 to 99.7.  Anything over 99.7 essentially means traders don't see much chance of a rate hike by January 2016.  Conversely, a price of 99 means traders see the Fed Funds Rate at 1.0% on average.  Notice how the trend had been clear in suggesting rates in the neighborhood of 0.8% by 1/2016 and then suddenly decided to change in October.

Investors are increasingly forced to confront the reality of economic cycles.  This one is getting long.  For all we know, it could end up being much longer than normal, but that doesn't mean traders aren't wondering "what if it isn't?"

These are the sorts of doubts that keep us "in the game," as it were.  When things like Greek debt drama, Chinese stock routs, and tumbling commodity prices (to name only a few) cross the tape, it becomes even easier for "global growth concerns" to be reflected in bond market trading.

All this to say: despite all the Fed rhetoric on rate hike intentions, despite things like the lowest Jobless Claims since '73, despite the broadest expansion in payrolls since the late 90's (just never you mind that it followed the sharpest contraction in payrolls since WW2), there is still a scenario where it could make sense for rates to fall.  All that having been said, it's just something to keep an eye on until and unless we make more meaningful headway.