Sept 13. Brainard throws cold water on Sept hike; greenlights steepeners
–Brainard’s speech yesterday caused the market to defer expectations of a hike from next week to December. October Fed Funds settled up 2 at 9957, indicating less than 15% odds of a hike in Sept, while Nov/Jan FF spread rose 0.5 bp to a new high at 10.5, odds of about 42% for December. While stocks celebrated continued easy money with a blistering rally that erased a large part of Friday’s sell off, the longer end of the treasury market was more circumspect. In comments this weekend I noted the 2/10 treasury spread was breaking out to the upside; yesterday it hit a new recent high of 90 bps, up 1.5 on the day. In eurodollars, the red/gold pack spread rose 2 bps to 47.875, also a new high, though still muted. 5/30 treasury spread rose 2.7 bps to a new high of 119.4. Today brings the 30 year bond auction.
–While Brainard is concerned about depressing inflation expectations, it’s somewhat interesting that the back end of the euro$ curve is finally displaying a bit of curvature. For example, red/green/blue butterfly settled -2.375. Closing one year pack spreads are as follow: red/green 13.875 bps, green/blue 16.25 and blue/gold 17.75. My bias is to interpret increased steepening along the back end as a slight increase in term premium/inflation. Perhaps grasping at straws, but worth a mention.
