How did today's Fed meeting affect your LDI strategy

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So, when in August last year, Ben Bernanke took the unprecedented step of signalling to markets that US short-term interest rates would be on hold until a specified date (mid-2013), I remember asking about the chances that he could back track on that commitment if the data changed. I was unconvinced by the then consensus response that, to back track would hurt Fed credibility. Today I believe we got our answer and I feel vindicated.



Bernanke effectively did a Keynes and said, as Keynes is purported to have said, "when the facts change, I change my mind". And so, whilst Bernanke today spoke about low rates through to the end of 2014, he has now made this commitment contigent on the data.

So, what does this mean for LDI?

1. If there was ever any doubt that Central Bankers don't have the foggiest about the likely future direction of interest (and inflation) rates, those doubts should have been dispelled by today's Bernanke press conference. In addition to the gem above, we had more excuses about why inflation has been sticky on the high side. Sound familiar? Merv and the boys have the same rhetoric on this side of the pond.

2. For this reason, taking large duration bets in either direction is a bit of a mugs game. This market can stay irrational far longer than you may be able to stay solvent.

3. Move immediately to scale your interest rate and inflation risk hedge to a level at which you would be comfortable, whatever the direction, over the next 5 years, of long-dated interest and inflation rates.

4. Allow discretion in timing the implementation of that move to scale the bet but ensure that there is a clear benchmark against which to assess the effectiveness of the implementation policy.

4. Such discretion should include both acceleration and deceleration points but, critically, allow discretion to actively manage the hedge both during implementation and once the hedge is built.

5, This discretion is not about heroic market calls on the level of rates and/or inflation but rather is mostly about taking opportunities to add value by exploiting market volatility.

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