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karhu

Interest Rate Futures Confirm Our Suspicions

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Interest rate futures are up sharply today (short Stirling contracts down). They have been sitting on the fence for a while, but now it looks like they have decided that the next change in interest rates will be up.

http://www.futuresource.com/quotes/quotes.jsp?s=LSS

Another nail in the house price coffin.

There does seem to be a better than evens chnace of a rise before a fall in IR. The currency markets are ignoring the VI news about houses going up and seem to be focused on other fundamentals such as employment and manufacturing. They know HPI is debt driven and is no longer healthy for the economy.

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Any predections for when the next move will be??

Thats the big question.

If I'm reading those figures correctly then they are pricing in 95.25 at September 2008.

So thats 4.75% rates in Sep 2008??

Thats a fairly mild pointer to a raise, but a raise nonetheless I suppose. :rolleyes:

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Any predections for when the next move will be??

Thats the big question.

If I'm reading those figures correctly then they are pricing in 95.25 at September 2008.

So thats 4.75% rates in Sep 2008??

Thats a fairly mild pointer to a raise, but a raise nonetheless I suppose. :rolleyes:

I think that should be Sep 07. Recently, the economic data has been conflicting and not giving much information for the markets to decide either way. However, the chances that a raise will come before Sep 07 are increasing every day now.

This may well be due to the BoJ tightening policy and the unravelling of the carry trade.

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Sentfleben said worries over interest rate hikes were offsetting gains after the European Central Bank (ECB) said money supply growth and loans to the private sector accelerated unexpectedly in the euro zone in January.

"This is a clear warning signal from the ECB," he said, adding that markets were now expecting the ECB to raise interest rates not only on Thursday.

http://today.reuters.com/investing/MarketR...-12_L27363403:1

Edited by karhu

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Short stirling contracts going mad. Sep 07 contract has moved by almost 10BPs in the last 24 hours. We're approaching six month lows.

By Katie Allen

LONDON, Feb 27 (Reuters) - UK government bonds modestly underperformed Bunds on Monday and short sterling futures extended last week's losses as the market continued to reassess the outlook for British interest rates.

Bunds also fell as markets braced for Thursday's expected European Central Bank rate rise but gilts booked sharper losses with the March long gilt future down 43 ticks on the session.

Short sterling also fell as traders continued to reposition after minutes last week from the Bank of England's February meeting failed to live up to markets' expectation that consensus was growing on the Monetary Policy Committee for lower rates.

"It's a choppy time in the UK at the moment," relative to the euro zone, said Richard McGuire, fixed income strategist at RBC Capital Markets.

All 65 economists polled by Reuters expect the ECB to raise interest rates by a quarter percentage point to 2.5 percent.

"In the UK it's much more open to debate. Two weeks ago you had the benign inflation data and the weak retail sales data when everybody ran to the rate cut side of the boat," said McGuire.

"Then ... we had the BoE minutes and the Inflation Report which has seen everybody run to the other side of the boat. This may just be momentum from that bearish shift last week."

Some traders said upcoming gilt supply also weighed on the market. The Debt Management Office is set to auction 3.0 billion pounds of 4 percent 2016 gilts on Wednesday.

Yields were up across the whole UK curve and at the short-end particularly, with 2-year yields 6 basis points above Friday's levels at a 3-1/2 week high of 4.36 percent.

Benchmark 10-year gilts yielded 4.22 percent up 5 basis points from Friday and underperforming the equivalent Bund where yields were 3 basis points higher on the day. That took the spread out to a two-week high of around 70 basis points.

Market players said higher stock market indices also hampered government bond markets. The UK's FTSE 100 <.FTSE> index of top shares set a fresh 4-1/2 year high on Monday.

http://today.reuters.co.uk/investing/finan...TS-UPDATE-2.XML

Edited by karhu

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I think that should be Sep 07. Recently, the economic data has been conflicting and not giving much information for the markets to decide either way. However, the chances that a raise will come before Sep 07 are increasing every day now.

This may well be due to the BoJ tightening policy and the unravelling of the carry trade.

Hi, can you please explain how to understand the futures data you posted. I am confused (its not hard:))

Cheers,

Mike

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Hi, can you please explain how to understand the futures data you posted. I am confused (its not hard:))

Cheers,

Mike

The figures quoted are Short Stirling contracts that refer to certain dates (call that, s). The effective interest rate that would result in that figure is 100-s. So, e.g., Jun 2006 Short Stirling contract quoted at 95.410 then the markets expect interest rates to be 4.59, i.e., a 64% change of IRs at 4.5% and 36% chance of IRs at 4.75% (assuming there are only two options, resonable IMO).

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Interestingly - The odds on Betfair on a March rise are shorter than the odds on a fall, with 'no change' obviously being the massive favourite.

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Interestingly - The odds on Betfair on a March rise are shorter than the odds on a fall, with 'no change' obviously being the massive favourite.

Yes, that's correct IMO. This months is a done deal - no change. Not even worth voting on. The chances of a drop or a rise are miniscule, but I'd imagine the chances of a drop outweight a rise this month.

Unless the bottom drops out of CPI, I expect the chances of a rise to gradually increase throughout this year, until we eventually get one and then we might get a few in succession.

Clearly, depends on US, Japan, how Stirling holds up and also domestic indicators such as CPI. Remember, the MPC have to look at the two-year window. If they see inflation over that period then they should raise, irrespective of short-term factors. Interest rate adjustments take months to filter through.

And should we forget fossil fuels and the resultant cost-push inflation.

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Yes, that's correct IMO. This months is a done deal - no change. Not even worth voting on. The chances of a drop or a rise are miniscule, but I'd imagine the chances of a drop outweight a rise this month.

Unless the bottom drops out of CPI, I expect the chances of a rise to gradually increase throughout this year, until we eventually get one and then we might get a few in succession.

Clearly, depends on US, Japan, how Stirling holds up and also domestic indicators such as CPI. Remember, the MPC have to look at the two-year window. If they see inflation over that period then they should raise, irrespective of short-term factors. Interest rate adjustments take months to filter through.

And should we forget fossil fuels and the resultant cost-push inflation.

Odds of a rise have fallen - Betfair now says a rise more likely than a drop. Quite a shift from last month.

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Odds of a rise have fallen - Betfair now says a rise more likely than a drop. Quite a shift from last month.

Yes, the trend is now towards a more hawkish tone on UK interest rates. IMO we're over the danger period, which was always Jan-Mar, and CPI is still on target. In my opinion CPI will go up from here and the MPC will be clear to reverse the 25BP drop they made at the end of last year.

The minutes will be interesting. If Steve Nickell votes for a hold that could really stoke up the chances of a rise.

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The figures quoted are Short Stirling contracts that refer to certain dates (call that, s). The effective interest rate that would result in that figure is 100-s. So, e.g., Jun 2006 Short Stirling contract quoted at 95.410 then the markets expect interest rates to be 4.59, i.e., a 64% change of IRs at 4.5% and 36% chance of IRs at 4.75% (assuming there are only two options, resonable IMO).

You also need to make an adjustment of between 0.1 and 0.15%

Also the market today has moved against an interest rate rise today. As it moves up towards 100 then it reduces the chance

Therefore if we look at Sept 95.37. So the calc is 100 -95.37 -.15 (adj) give 4.48% expected interest rate then

If you want to look here , you can get todays repo rates.

http://www.bba.org.uk/bba/jsp/polopoly.jsp?d=228&a=1451

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      • down 5% +
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