3 Scenarios of This Fed Meeting and Their Implications

Three possible scenarios

.             The Fed announces a 25 bps hike. The phenomenon of “Buy on rumor, sell on news” kicks in and Treasury yields, which have spiked over 3% on the 30-year bond, a 50-basis-point jump over the last month, begin to retrace the increase. To speculate on this scenario, you could buy a long-Treasury ETF such as TLT, which gives you a solid shot at profiting as the traders take profits. Few will expect the Fed to continue to raise rates aggressively in 2017, or at least to the degree that would represent a major trend change.
Per other recent articles in this service, historic levels of government, corporate, and personal debt serve as a physical cap on interest rates. Simply, rates can’t rise very much because the beginning of a secular rise in interest rates would mean the end of well, everything.

•             The Fed announces a 50 bps hike. In this case, the stock market will crash. And historically, when stocks crash, money pours back into bonds, meaning yields will come down. Maybe they’ll go up a bit first, but in the end TLT will still likely turn out to be a profitable trade as there is little question it has run up too far, too fast in recent weeks. Again, the odds of this happening—at least according to traders—are effectively zero.

•             The Fed announces it will leave rates where they are. In that case, a mad scramble for the exits by the traders with bets on higher rates will ensue. Treasury yields will quickly retrace and probably overshoot on the downside… again making TLT a great trade.

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