At 2:00 PM the Fed’s FOMC meeting concludes.  There is near universal consensus the Committee will increase the overnight rate by 50 bps.  The talk of a 75-bps jump is growing, the greatest increase since 1994.   I could argue that if the Fed only goes 50 bps equities will fall under the proverbial guise the Central Bank is behind the proverbial curve.

Conversely, I could argue a 75 bps would ignite a rally for a similar reason…the Fed is ahead of the curve.

The volatility is intense.  The media is focused on bitcoin’s 70% plunge.  The volatility in the Treasury market is worse.  According to Bespoke Investment Group, Bitcoin’s fall was a 2.7 standard deviation move based on data going back 2016.  That was nothing as compared to the 4.2 standard deviation move on the 10-year and the 5.68 standard deviation move on the two-year Treasury.

To write it differently 99.85% of the time the outcome of an event occurs within 3 standard deviation and 99.99% of occurrences occur within four standard deviations.  Something occurring in the fifth standard deviation occurs approximately 0.0009%.

Writing it differently, a four standard deviation move “is supposed to happen once in more than a century.”  A fifth standard deviation move, “almost never.”  Wow!

Many times I have commented about the lack of liquidity in the markets and a strong argument can be made this intense volatility is a direct result of a dearth of market stabilizing mechanism.

Will the Fed comment about the liquidity issues and the huge three-day surge in yields?

Also today is the first day of QT.  Approximately $15 billion of Treasuries will “roll off” the Fed’s balance sheet.  Will this be something of significance?

Commenting further about liquidity issues, Bloomberg wrote late yesterday afternoon cash prices for two of the largest exchange traded bond fund closed at steep discounts to their underlying assets on both Monday and Tuesday.

Such price inconsistencies are normally repaired by specialized traders known as authorized participants, who pocket a virtually free risk-free profit in the process.  The heightened volatility however can “severely challenge” the liquidity of these authorized agents and some believe this could evolve into a systemic risk or issue.

The last time such discrepancies occurred was March 2020 when the Fed injected $5 trillion into the bond market to provide needed liquidity,

Regrading yesterday’s market activity, long dated Treasuries continued to sell off with some fearing the Fed could easily loose control if the central bank does not take aggressive action.

Equities were volatile with the S & P 500 closing lower for a fifth straight day.  The NASDAQ was virtually unchanged.

The close of today’s trading can be greatly influenced by the outcome of the Fed meeting.

Last night the foreign markets were up.  London was up 1.05%, Paris up 0.73% and Frankfurt up 1.01%.  China was up 0.50%, Japan down 1,.14% and Hang Seng up 1.14%.

Dow and NASDAQ futures are up 0.50% and 0.70%, respectively ahead of the potentially largest rate hike since 1994.  The 10-year is up 22/32 to yield 3.38%.


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