March 19. Pointing out the obvious?

Below is a chart of 5/10 treasury yield spread (white line) with the Fed Fund target rate (orange stair-step).

As you can see, the 5/10 flattened hard during the 2004 hiking cycle, as the Fed Funds went from 1% to 5.25%.

Then of course, the curve steepened in 2007 as the Fed eased (yields in front end of curve go down harder).

The current episode of flattening since the beginning of 2014 has occurred against the backdrop of a flat-line funds rate of 1/4%…but it looks the same as a tightening cycle.

The reasons are 1) Fed’s removal of accommodation through taper and frd guidance 2) disinflationary pressure of oil and other commodity declines  3) the stronger dollar, which imparts a deflation bias.

Today the curve flattened as there was heavy selling in the front end of the curve, surprising given the dovish press conference yesterday.

However, as economic data falters, I think the flattening will come to an end…


5/10 treasury vs FF's

5/10 treasury vs FF’s


Posted on March 19, 2015 at 3:16 pm by alexmanzara · Permalink
In: Eurodollar Options

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