Dec 19. In 2013, yields pushed higher right up to the end of the year…then started to decline
–Front end of the curve has seen steepening since the FOMC. For example, in euro$’s, March/June closed 19.5 on Friday, the peak three month spread. [Note that EDH7 expiry is 13-Mar and the FOMC is 15-Mar. We will NOT know the outcome of the FOMC for March expiry]. Recall that in October, three month spreads were more like 3-4 bps. Some of the one year calendars posted new highs as well, with the peak remaining March’17/March’18 at 66.5 bps, forecasting a bit closer to three Fed hikes in the new year rather than two. As a contrast, consider the 5/30 treasury spread. Just prior to the Fed it was posting new highs of 127 bps, but on Friday it closed at 110. I marked it roughly at 106 on Thursday.
–In terms of another near term Fed hike, the Feb/April FF spread settled 6, so about one in four chance of a hike in March. (The Jan/April spread settled 7, and Jan/Feb at just 1. So there’s really nothing priced for the chance of a hike at the Feb FOMC meeting, or even a soft turn).
–Implied vol reflects the curve dynamics. Five year vol remains solidly above the midpoint of its recent range, while the longer end premium had some air let out, and is now closer to the low end of the recent range. Having seen stocks surge and oil remain well bid after the election, the long end of the market is, perhaps, becoming a bit more circumspect with regard to actual inflation prints. Obviously, recent moves have all been on changes in perception. Some analysts are leaning against this tide. For example, here’s a snippet from David Rosenberg, “The economy isn’t that strong and anyone who thinks one man can reverse on his own the structural forces that led to the multi-year disinflation trend — and I’m talking about excessive debt, globalization, aging demographics and technology — needs to go back to economics school right away.” It’s true that strong headwinds articulated by Rosenberg still remain. But it’s also true that the lessons from ‘economics school’ are being re-written due to recent history.
–Yellen speaks about labor markets this afternoon (victory lap?). January treasury options expire Friday.
