{"id":181,"date":"2013-10-28T15:25:52","date_gmt":"2013-10-28T15:25:52","guid":{"rendered":"http:\/\/www.stirfutures.co.uk\/?p=181"},"modified":"2014-02-15T11:12:06","modified_gmt":"2014-02-15T11:12:06","slug":"central-banks-and-short-rate-trending","status":"publish","type":"post","link":"https:\/\/www.stirfutures.co.uk\/?p=181","title":{"rendered":"Central banks and short rate trending"},"content":{"rendered":"

In the G3 80% of base rate changes are in the same direction as the previous change.<\/h3>\n

Tapering talk and improved G3 economics leads to one inexorable conclusion: \u00a0We are probably in the endgame of historically low rates and the consequence of improved economic output and \u00a0cutbacks in US asset purchase programs should result in steepening yield curves and a general increase in rates.<\/p>\n

Although it is unlikely that there will be base rate changes for some time, STIR futures are largely about expectations and the prospect of some eventual central bank action prompted me to revisit an old study from UBS written by Antony Morris called Using trend strategies to benefit from gradualism in monetary policy, October 2006.<\/i><\/p>\n

This study put forward an interesting hypothesis that central banks create trends in short-term rates and often STIR markets do not price in these trends. Indeed, the table below shows that over a significant period of time, one central bank rates change is followed by one in the same direction.<\/p>\n

\"central<\/a><\/p>\n

You can\u2019t get much better than that for a long term trending market, something in scarce supply for systematic traders in recent years. Indeed, the trends are actually enforced by the very nature of central banks when compared to other markets like equity.<\/p>\n