A Special Report: Changing US Interest Rate Expectations Changes Everything: Explanation, Ramifications, How To Profit, Effects on FX in general, EURUSD in particular
The following is a partial summary of the conclusions from the fxempire.com  fxempire.com ’ meeting in which we share thoughts about key developments worth a special report.Â
Summary
- Leaks From Bernanke “Private†Dinners: Low Rates For Much Longer Than Expected
- FOMC’s Incoming New Governors: Strengthening Yellen’s Dovish Hand, Reinforce This Idea
- Already, Unwinding of Short Positions Forcing Bond Prices Up And Yields Down
- Ramifications For Markets, Guidelines On How To Profit
One of the biggest stories in global financial markets this year, particularly in currency markets, is the shift in US interest rate expectations. This is huge, because as we’ll describe below, it affects almost all major global markets and asset classes.
First, look what’s been happening to yields on the benchmark 10 year US Treasury Notes.
 
Yield On 10 Year US Treasury Note From January 1 2014 To Present
(Source:Â Yahoo finance)
03 May. 26 10.08
Despite the presumed recovery that is supposed to bring higher rates, they’ve been falling, especially recently. Why, and why the recent sudden dive?
1.     Leaks From Bernanke “Private†Dinners
On March 5th, Reuters reported that former Fed Chairman Bernanke, who retired from the Fed at the end of January, had begun hitting the speaking circuit and cashing in on his experience. On March 4th he earned $250,000 for giving a talk at a banking conference in Abu Dhabi. That’s more than his entire $199,700 annual salary as Fed Chairman.
In the months since then he’s earned that fee many times over from various other speaking engagements, and can be expected to continue doing so as long as he’s seen as an insider with unique insights into current Fed policy. That could last a while.
In addition to being as close to the process and fellow Fed governors as one can be, he is known to be close with the new Fed Chair Janet Yellen, and believed to share her views. All of which supports the belief that he should continue to be the premier Fed insider who is legally allowed to say what he thinks about the likely direction of Fed policy. Given that Ms. Yellen is trailblazing the gradual transition back to historically normalized interest rates after the biggest monetary stimulus experiment ever, investors have advanced insight into how the Fed is going to proceed could have a huge advantage over those who don’t.
Obviously the attendees who can afford to split his fee are mostly those who can justify the expense both for its hard information and prestige, those responsible for managing huge investment portfolios and hedge funds.
Looking at the above chart on 10 year Treasury note yields, it appears that in April word began to leak out about Bernanke’s key message, with technical traders and computer driven traders probably noting the price action and adding to the selling. As recently as September, the Eurodollar futures markets suggested they didn’t expect the fed funds rate to be back at 4% until 2018, however now they’ve pushed that off until 2022.
So it’s not surprising that on May 16, Reuters came out with a follow up piece allegedly revealing to the masses what Wall Street’s elites had been paying a substantial share of that $250,000 (before travel expenses) fee to hear in small round table discussions at some pricey restaurants where they were free to ask questions. The key points:
…that easy-money policies and below-normal interest rates are here for a long time to come, according to some of those in attendance.
Bernanke, who retired from the U.S. central bank in January, has predicted the Fed will only very slowly move to raise rates, and probably do so later than many forecast because the labor market still has a lot more room to recover from the financial crisis and recession.
In one dinner-table exchange with investors, Bernanke argued that fiscal tightening, constrained financial markets and lower U.S. productivity all point to lower real rates than would be considered normal for a long time to come.
