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The Most Important Market No One Is Watching


You can't have stronger nominal growth and lower interest rates. When the market begins to discount may be anyone's guess, but it will most certainly show up in the bond market.

Yesterday at lunch I picked up a copy of the New York Times and this is how the Saturday edition of Stocks and Bonds would characterize the bond market's wild ride:
The Treasury's benchmark 10-year note rose 3/32, to 99 20/32, and the yield fell to 1.67 percent from 1.68 percent late Thursday.

That's it; one sentence. There was a lot of talk about employment, stock market resiliency, QE III, and the warning from Intel (INTC) but nothing on the bond market. Let me tell you there is no more important market in the world right now than the US Treasury market and there may be no more important security than the 30-year futures contract.

When I was beginning my finance career I spent a few months as a desk jockey on the middle markets fixed income desk at Bear Stearns in Atlanta, GA. At the time, Bear Stearns was well known for its presence in the mortgage market. The infamous Howie Rubin was head CMO trader at Bear Stearns and my manager was a semi-retired mortgage trader who had previously worked in New York. His name was Bob Shoemaker.

I really don't recall ever seeing Bob much look at Bloomberg or his computer screen, or pick up the phone to call a trader except maybe to exchange a funny story. He pretty much read the paper all day long while responding to typical managerial duties. Yet during the day, randomly and out of the blue, he would shout out across the desk, where's the contract? John Shapiro, who was the youngest but also probably the smartest producer on the desk, would quote him. Never even putting the paper down, Shoemaker would respond with his order. Take it!

The contract is the 30-year bond contract traded at the CBOT. Bob and John would trade it like this all the time. I became fascinated. Bonds weren't just something you buy and hold to maturity; they are just like stocks or anything else you actively trade.

Months later I would go visit my cousin in NYC, and I asked Bob if he could get me on the trading floor at Bear. He did, and I got to spend a slow Friday on that historic desk with the mortgage pass-through traders. That experience was all I needed to know that I didn't want to just work in the securities business, I wanted to work on a Wall Street trading floor.
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