May 19. Theme of curve flattening
–Light news week coming up, with FOMC minutes released on Wednesday. Yields edged slightly higher on Friday, but the red pack to deferred closed at marginal new lows for the move. For example, red/green pack spread is nearing 100 bps, closed at 103.375.
–Three months ago EDM16 was in the same general area as it is now, around 9850. This was prior to the March FOMC when Yellen suggested tightening could begin 6 months after the end of tapering. A comparison between spread levels then and now reveals the extent of curve flattening. On Feb 18, red/green was 94, now 103 (+9). However, red/blue was 196, vs current 185 (-11), and red/gold was 279, now 241 (-38). A weekend article in Reuters says that Bernanke doesn’t expect the Fed to move for some time, and further doesn’t expect Fed Funds to normalize near 4% in his lifetime. Perhaps the heavy buying in EDZ’15 and EDH’16 contracts is a direct result of information gleaned from these private speaking events? In any case, red/green appears destined to move below 100 again.
–Several recent articles pertaining to the Fed have emphasized financial stability as a key responsibility of the central bank. Perhaps it’s due to Stein’s recent departure and his concern with the topic. However, the long period of zero rates has caused extreme spread compression, which could result in panicked unraveling should there be another whiff of financial crisis. Interesting to note the DB is raising another €11 billion of capital in this environment.
