The markets went haywire yesterday and the explain-a-palooza has been in full gear. Here's the angle we are coming from: Its all about the positions.
We have, ad nauseum, railed against the "openness" policy at the Fed and the tethering and jawboning of expectations expressed in forward market prices. Essentially, The Fed promulgated a universal position then watched it blow up. The market, in fact, was conservative in its evaluation of FG. Now Fed Talking Heads are backtracking.
PIMCO WG (with Gross) and Janus AG (after Gross), are just 2 examples of positioning large to FG. Long the Eurodollar Strip and short the Vol was buying into FG whole hog. When the market repriced rather than slowly roll up over time, things got weird.
We, and many others, have also warned that FI desks have been gutted as regulatory and reality changes have altered the PD/bank landscape. The CME Group may laud the VOLUME but the massive Open Interest drop and price spike show there is no LIQUIDITY.
Remarkably, we are to believe that a sudden 100 BP shift in the color coded Eurodollars over a month and a 450k drop in open interest -IN A DAY ! - resulted in no P/L damage to anyone. We are going out on a limb here..Somebody got hurt...BAD. We'll find out who and how bad over the next few months.
Dysfunctional markets are driven by liquidation and It's always about the positions. I'd love to see a damaged speculator sue the Fed for following their guidance. Now lets see who wants to come back and play again.