Hey There Income Hunter,
The Fed may be on the verge of launching a sneaky market stimulus program under the radar, and you need to be aware of it.
A couple of weeks ago, that something was the US Treasury bond market. Foreign central banks were spooked by the US freezing Russia’s foreign reserve assets. This led to the banks selling their US Treasury bonds, which was what they bought with their foreign currency reserves.
The lack of buying, coupled with new selling of Treasury bonds, created a supply/demand imbalance and bond volatility went through the roof.
Now, understand that a stable bond market is more important to the Fed than inflation. The markets saw first hand how damaging an illiquid bond market can be when the UK bond rates moved 1.4% in a single day based on similar dynamics …
This startled the Fed, so officials went to their primary dealer banks and, sure enough, the idea of Operation Twist has been leaked through the system.
Operation Twist is the selling of short-dated bonds, which are heavily in demand, to buy longer-dated bonds, which are less liquid and riskier …
Even though Operation Tiws does not imply money printing, it has massive ramifications for the markets …
Today, I’ll set you up with trade ideas based on its implications.
Fed Tightening Cycles Never End Well
As you can see in the chart below, a Fed tightening cycle never ends well. They usually break something and then the central bank has to pivot back to QE. This episode will be no different …
A few things have broken, for instance
- The Bank of Japan (holding rates at .25%).
- The Bank of England (emergency QE)
- US Treasury yields have surged relentlessly higher
In fact, the latter climbed for nine-straight weeks, the longest such streak since early 1994, jumping 1.18 percentage points in that time.
The whisper is that the Fed went to the primary dealers who, without a doubt, asked for help. That’s what banks do whenever possible …
However, the bottom line is the bond market is dealing with three disasters at once:
- High debt loads and unsustainable fiscal spending
- Restrictive regulations (no central clearing)
- Markets free from central bank intervention (QE in the form of asset purchases)
I believe the Fed will address financial instability quickly because of their intent on getting inflation to trend lower.
How to Make Money From Operation Twist
The iShares 20+ maturity Treasury Bond ETF (Ticker: TLT) is the ideal bond ETF to execute a bullish option strategy for an Operation Twist call by the Fed.
The Fed is certainly talking to the G4 central banks – US, EU, UK and Japan. OT and continued rate hikes are exactly what the Fed could use right now.
Any announcement, or even a run up to the Fed meeting, will keep a bid underneath the market …
You may get a chance to put on a trade this week as the Treasury issues $43 billion in 5-years today and $35 billion in 7-years tomorrow. Notice the gap down to the 94 level on the chart below.
On a move down to 94, the Nov. 95/98 call spread for $1.30 would be reasonable and provide an excellent risk/reward trade.
You can stop yourself on a close below 93 to limit your capital at risk.
Bring It Home
Playing the odds when the Fed is moving offers great high-probability trades.
And the Fed will be very active in the months and years ahead.
My personal system will reveal signposts that provide key insight into where money is flowing based on Fed action … and provide you with an edge in the markets.
Call 1-888-872-3301 and speak to the Option Pit Customer Care team starting at 9 a.m. today for all the details …
And tuned for more Fed insight in the days ahead. Until then …
Live and Trade With Passion My Friend,
Griff