STIR (Rates) Application Process (Lite)
A simple approach for STIR
Over the past few weeks I have received a number of questions about rates… This post looks to answer some of these. Generally, when people talk about rates, they usually talk about a number 10s are up, 2s are down, two cuts are priced. That’s fine for a headline conversation and talking with your mates, but it’s not how I stay oriented when the market is actually moving.
When I’m trying to understand what’s happening in rates, I’m not trying to predict the next print. I’m trying to answer a simpler question… What story is the market repricing right now, and where is the risk sitting?
The quickest way I know to do that is to stop treating rates like one thing and start treating them like a map. The SOFR strip is one part of that map (with many sub-sections within). The Treasury (Bond) curve is another (again with many sub-sections). Once you get used to reading them together, the day becomes much easier to interpret, and much easier to trade without forcing it.
I start with three
Every session looks unique in the moment, but most sessions are the same handful of moves in disguise. I keep myself honest by starting with three questions. I’m not trying to be clever, I’m trying to be consistent.
First: where did it move?
Did the action come from the front end, the belly, or the long end?
Second: how did it move?
Was it a simple shift higher/lower across the curve, or did the curve twist (steepen/flatten), or did the belly behave differently than the wings?
Third: why did it move?
Was this mostly the market repricing the policy path, repricing the growth/inflation outlook, or repricing term premium / supply / positioning?
If I can’t answer those three questions in plain English, I assume I’m missing something. And if I’m missing something, I keep my risk light.
