Dec 26. The forward curve projects ….. BORING
–Yields declined on what appeared to be a low volume short covering rally. Tens fell 5.3bps to 241.2. The curve flattened to new lows. With this week’s auctions of 2’s and 5’s, 2/10 is now just 51.7 and 5/30 at 52.8. The 5/10 treasury spread is below 20 bps (I marked at 19.2). It’s the same story with eurodollars. Red/gold pack spread collapsed by 2.75 bps to just 21. The red/green pack spread is 8.375. All new lows. As mentioned yesterday, the low in red/gold in 2006 after 13 straight hikes (there would ultimately be 17) was just over 10 bps. So we’re currently 11 bps away.
–When looking at 3 month euro$ deferred calendars, it’s remarkable to see several of them at 1 bp and one (EDZ19/EDH20) at just 0.5. It might be understandable if rates in general were much higher, but EDZ19 is 9766.5 and EDH20 is 9766.0, a forward ‘forecast’ of 3 month libor at just 2.34% in TWO years! There’s not much of an inflation premium built in. Just blind acceptance of low R* which the Fed unwittingly reinforces.
–The dollar index is within spitting distance of the low of 2017. Economically sensitive commodities like copper and oil are going out at the year’s high. Yet the forward euro$ curve can only see low growth and low inflation. It’s often said that the interest rate markets are much ‘smarter’ than equities. But it all looks stupid from here.
–Job Claims expected 240k. Chicago Purchasing Mgr expected 62.0.
