Dec 30. The yield curve indicated high hopes for the start of the year, but ended at its flattest…just like the Chicago Bears
–Some powerful trends continued into the end of the year. The dollar index made a new high yesterday as problems in Greece caused the euro to make a new low, now near 121.50 and nearing a low from late 2012. Crude oil plunged over $1 yesterday and is now nearing 53, the lowest level since 2009.
–The ten year yield fell 4 bps yesterday to 220.5. Though not quite at new lows for the year, the curve is hovering just a few bps above its flattest levels. For example 2/10 is 149.5, started the year at 260. 5/30 is 106.5, started the year at 220. And red/gold eurodollar pack spread is 127, having started at 303. The ten year swap spread is at a five month low of just 11.25 bps, though it’s been a pretty tight range and is only 5 bps lower than the year’s high just above 16. 2014 started the year with hopes of sustained higher rates, with many calling for 3.5 to 4% for tens. Perhaps pricing at the end of the year has gotten a little too pessimistic?
–Many analysts seem to think the US can “go it alone” in terms of continued growth. But the strengthening dollar is a stealth tightening of monetary policy at the same time that the oil price plunge knocks a prop out of a major driver of growth in energy. The US interest rate curve has already interpreted the ramifications, pricing in the scenario of modest Fed hikes next year followed by…nothing.
–The eurodollar pack spreads give an indication. Reds to greens (2nd to 3rd year) is just under 71 bps. Greens to blues (3rd to 4th) is half that at 35.5. And blues to golds (4th to 5th) is about half again, at 21.
