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Email this6:03 pm
September 29, 2017
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Want to know what REALLY determines the interest rate changes? There is A LOT of discussion about this, and there are many talking points that the Feds use to justify changing, or not, the rate. BUT NONE OF THEM ACTUALLY have ANYTHING to do with the rate change. They only are used to try to make them look like they are in control and have an influence. THEY DO NOT!
The REAL and ONLY influence is the short-term bond market (3- and 6-months).
As I have demonstrated TIME AND AGAIN, changes in BoC rates has NOTHING to do with political pressures, inflation, economic indicators, employment rates, or any other indicators. It is 100% driven by the short term bond market, and the Gov of Can NEVER leads the trend, it ALWAYS follows! (this can be seen for DECADES)
Simply pull up a chart of the short-term bonds and add the BoC rate changes. You will see that the BoC rate changes ALWAYS follow the market, never leads. The rate will NOT change until there is at least a 25pts differential between the current BoC rate and the short-term bond market (the 6-month bonds seem to be the best correlation).
So, don't pay heed to the talking points...they are meaningless.
Also, the US and CAN rate changes are NOT linked in any way. The US rate changes also follows its own short-term bond market, The US and CAN markets MAY correlate at times, but there are many times they do not follow each other. Therefore, the US and CAN bank rate changes do not follow each other.
I learned about this a few years ago via a financial service I follow and only in the last 2-3 years finally decided to check it out for myself, and found that it is 100% reliable. No longer are rate changes a surprise. You can see, and therefore estimate the rate change amount and the timing.
The only thing that may not be perfect is the exact timing that the banks decide to make the change, but it would only be a difference of one decision-making cycle.
So, I now keep a chart with all these on there to be able to very easily track and predict the amount and direction of change.
No longer be swayed (or fooled) by all the talking points. Check it out and prove it to yourself!
7:16 pm
January 13, 2022
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I've noticed in the US, the fed rate seems to tag along wherever the 3 month t-bill takes it, and not vice versa. Same in Canada, then?
7:33 pm
March 8, 2022
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smayer97 said
No longer be swayed (or fooled) by all the talking points. Check it out and prove it to yourself!
You make a good argument, and I am not smart enough to disagree.. Just want to point out that every theory make sense, until it doesn't.
You know the saying, if I could tell the future I sure wouldn't be here right now commenting on your post.
9:10 pm
September 29, 2017
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lifeonanisland said
I've noticed in the US, the fed rate seems to tag along wherever the 3 month t-bill takes it, and not vice versa. Same in Canada, then?
Yes, just use the CAN equivalent gov't bonds.
9:13 pm
September 29, 2017
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rpotter28 said
You make a good argument, and I am not smart enough to disagree.. Just want to point out that every theory make sense, until it doesn't.
You know the saying, if I could tell the future I sure wouldn't be here right now commenting on your post.
Well it has proven itself for DECADES now, 100% of the time. Not sure how much more you need to see before it is clear. This does not require much to "tell the future", as it tells itself... Note, I am not saying you can predict rates many months or years in advance. This is only useful for short-term "prediction".
4:35 am
March 30, 2017
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Even if what’s said is true, which is totally not, it’s of zero value to fixed income investors. One invest at the bond market rate, not the CB rate. And it does not matter for those who has a variable rate mortgage tied to prime rate either. Whether it’s higher or lower, the borrowers already contracted to pay whatever rate it is.
Bond market adjusts after ‘hearing from CB’ at each public speech and bank meeting, not react after ‘seeing’. That’s why bond market rates always appear move ‘before’ CB actual move, when they 100% don’t. If you are a professional bond trader, you will know…
5:10 am
April 27, 2017
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smayer97 said
Well it has proven itself for DECADES now, 100% of the time. Not sure how much more you need to see before it is clear. This does not require much to "tell the future", as it tells itself... Note, I am not saying you can predict rates many months or years in advance. This is only useful for short-term "prediction".
Correlation is not causation. Its a chicken and egg type of argument. Market is trying to guess the same things as central banks and responds to the same factors. And for short term bonds, its effectively trying to predict the next CoB move. And to guess, Mr Market accounts for economic indicators, likelihood of political pressure making a difference, previous guidance from Central Banks, etc. Its a voting mechanism on all these factors.
10:44 am
September 29, 2017
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100% "correlation", over decades? hmmmm
10:47 am
September 29, 2017
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savemoresaveoften said
...
Bond market adjusts after ‘hearing from CB’ at each public speech and bank meeting, not react after ‘seeing’. That’s why bond market rates always appear move ‘before’ CB actual move, when they 100% don’t. If you are a professional bond trader, you will know…
What you are missing is that the bottom line is that the CB rate does NOT change unless the bond market changes more than 0.25%. So, even if what you say were true, all that matters is the bond market, not what the CB says. If the bond market does not move, the CB rate WILL NOT move. Period!
10:50 am
September 29, 2017
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savemoresaveoften said
Even if what’s said is true, which is totally not, it’s of zero value to fixed income investors. One invest at the bond market rate, not the CB rate. And it does not matter for those who has a variable rate mortgage tied to prime rate either. Whether it’s higher or lower, the borrowers already contracted to pay whatever rate it is.…
Also, I never said who this is good for. I am simply pointing out how to know the timing and direction of the CB rates. Who it is useful for is a separate discussion and not my point, and therefore not the purpose of this thread.
Therefore, all their jabberjaw reasons for changing, or not, the CB rate, is immaterial, and frankly, nonsense.
2:18 pm
March 30, 2017
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smayer97 said
What you are missing is that the bottom line is that the CB rate does NOT change unless the bond market changes more than 0.25%. So, even if what you say were true, all that matters is the bond market, not what the CB says. If the bond market does not move, the CB rate WILL NOT move. Period!
Well then what do u think is the purpose of the central banks’ statement at each meeting ? Why don’t they just announce rate only….
The whole purpose of the statement is to ‘prep’ the market for the next possible move or no-move. And that is exactly why you will ALWAYS see the bond market moves first. But it is still the CB that ‘triggers’ change in rates. The actual rate announcement is a moot point by itself.
There are only a few incidents in the past 30 years when what the CB ended up doing was wildly different from what they ‘broadcast’ in advance, and market had to adjusted immediately (think surprise rate cut, the referendum, financial crisis, Covid etc). Since the Greenspan era, CB strives for transparency not surprises. However Greenspan is the hardest one to ‘interpret’. He pioneers the word ‘conundrum’ in the financial mkt too.
3:19 pm
September 29, 2017
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Then you are not following closely enough... There are many times th CB makes announcements and the markets do not react.
Then they colour the actual rate changes, or not, on many "factors", but NONE matter... At the end of the day, no matter how you look at it, if you really want to know where the rate is going, watch the bond market. THAT is the definitive direction and amount, as it synthesizes ALL the influences. EVERYTHING else is meaningless.
This is EXACTLY the same with earnings announcements for stocks... markets can move significantly differently than the announcements, for many reasons. (And yes, I understand the notion of markets anticipating earnings, and missed expectations, and yet, even that does not guarantee a correlation). In like manner, price action is the final determinant.
Another way to put all of this is, you cannot take any action based on what is said or not said BUT you CAN anticipate and take action based on what the market actually does.
3:35 pm
September 29, 2017
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Another way to think of this is, the CB shares info about what is happening in the economy, and they may even try to influence the market direction by stating that they are thinking about doing so and so, or even will or will not do so and so.
BUT the CB WILL NOT change the rate unless THE MARKET tells them to, by affecting the price of bonds.
Again, in other words, the CB ALWAYS FOLLOWS the market, and NEVER LEADS it. That is what the charts have shown for DECADES!
3:43 pm
February 7, 2019
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Why not just agree that they move together and call it a day?
Those earning interest like the rates going up while those paying interest like them going down. The two groups will never agree on the right path.
| CGO |
5:23 pm
April 27, 2017
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smayer97 said
100% "correlation", over decades? hmmmm
Stanley Cup finals closely follow Victoria Day. Every year. Proof positive that Queen Victoria is running the NHL.
In reality bond markets regularly react if something unexpected happens on the day of BoC announcement. I recall several occasions when the movement has been very sharp. Most of the time markets react to forward guidance. Sometimes to unexpected rate announcement.
5:45 pm
October 27, 2013
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There is nothing new in what smayer97 is saying. Go to https://en.macromicro.me/collections/51/us-treasury-bond/762/us-fed-funds-rate-treasury-bonds-rate and click off all lines except the first two lines and select 10 year for a better visual. This is non-news, available for all to see for decades, including those very smart institutional and commercial players in the money markets. It is still ALWAYS news when the Fed fund rate changes.
8:03 pm
September 29, 2017
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cgouimet said
Why not just agree that they move together and call it a day?Those earning interest like the rates going up while those paying interest like them going down. The two groups will never agree on the right path.
This has nothing to do with two groups agreeing to anything. This is simply about bringing to light simple cause and effect.
8:05 pm
September 29, 2017
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mordko said
Stanley Cup finals closely follow Victoria Day. Every year. Proof positive that Queen Victoria is running the NHL.
In reality bond markets regularly react if something unexpected happens on the day of BoC announcement. I recall several occasions when the movement has been very sharp. Most of the time markets react to forward guidance. Sometimes to unexpected rate announcement.
Whatever you "recall" is just anecdotal. What I am presenting is information that is objectively verifiable, and therefore useful to knowing how the CB rates are determined. And the any change in rate is ALWAYS FOLLOWING the short-term bond market. Just pull up a chart and prove it to yourself....OR if you can, prove it otherwise.
Also, whether there is a reaction or not AFTER the CB rate change is immaterial to what I am presenting. It only matters if that reaction carries to the next scheduled rate change decision date. If the rate is still > 0.25% away from the current rate, the CB will make another adjustment, AGAIN in RESPONSE to the market.... so again, no matter how to look at it, it is ALWAYS FOLLOWING the market.
SO, all you need to do is read the chart before the next decision date to fairly accurately predict what the next change will be.
8:11 pm
September 29, 2017
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AltaRed said
There is nothing new in what smayer97 is saying. Go to https://en.macromicro.me/collections/51/us-treasury-bond/762/us-fed-funds-rate-treasury-bonds-rate and click off all lines except the first two lines and select 10 year for a better visual. This is non-news, available for all to see for decades, including those very smart institutional and commercial players in the money markets. It is still ALWAYS news when the Fed fund rate changes.
No one said it is anything new. The point is that not everyone knows about this, instead pontificate on what did or did not cause the rate to change.
And of course when the CB changes the rate it is always news... especially that what news is...BUT this is beside the point.
The main and important point is that the fact still remains, CB rates will ONLY change if there is more than a 0.25% change in the short term bond market. The point of this thread is to highlight that if you want to know if, when, and by how much the CB rate will change, just monitor this market. No need to bother with all the talking points, either before or after, as it is the market that will determine the rate. It is no harder than that.
8:28 pm
April 27, 2017
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smayer97 said
Whatever you "recall" is just anecdotal. What I am presenting is information that is objectively verifiable, and therefore useful to knowing how the CB rates are determined. And the any change in rate is ALWAYS FOLLOWING the short-term bond market. Just pull up a chart and prove it to yourself....OR if you can, prove it otherwise.
Also, whether there is a reaction or not AFTER the CB rate change is immaterial to what I am presenting. It only matters if that reaction carries to the next scheduled rate change decision date. If the rate is still > 0.25% away from the current rate, the CB will make another adjustment, AGAIN in RESPONSE to the market.... so again, no matter how to look at it, it is ALWAYS FOLLOWING the market.
SO, all you need to do is read the chart before the next decision date to fairly accurately predict what the next change will be.
I don’t need to read the chart. Bank itself telegraphs its next moves well in advance and thats the guidance which is a key input into how the bonds are priced. Occasionally surprise datasets cause an unexpected move by the bank. Then the bond market reacts because expectations change. Like in January 2015 or July 2017.
Do you know what correlation means? Yes, bonds and CofB overnight rates are positively correlated. That’s a “verifiable fact”. The fact a and b are correlated (which nobody disagrees with) tells us zero about causation. Nothing whatsoever. Regardless of the period of time you are looking at. Anyway, I am done.
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