• “Start getting used to taller candlesticks.” (Jan 22)
  • [On steepening] “Part of this is what I had been saying for a few weeks now – the bears had been concentrating on being short the front end (possibly with longs in the longer end), while the bulls concentrated on the longer end.  As often happens, we got the move that hurt the most people.” (Jan 22)
  • “AOTBE, if the FOMC is full of Democrats, aren’t they likely to be appalled by what is going in the US?  The bearish FOMC tail looks smaller.” (Twitter, Jan 31)
Watch for some new features later this month!

Weekly Essay: ED-FF Spreads Have Been Widening

I sent out an email earlier in the week discussing the noticeable ED-FF spread widening since the start of the year.  On the right is a chart of EDH7 vs a 50-50 weighting of FFJ7 and FFK7.  This FF mix matches up the Fed meetings in EDH7 exactly, and is a good reference point for the libor spread widening.  The spread settled Friday at 36.75, but this looked to be a high settle in the spread (EDH7 settled a little low).  The previous post-Treasury money rule high (from mid-October) was 36.5.  So we are in the ballpark of that previous high.  But as you can see from the August high, there is no reason to think this couldn’t go higher.  I’m not saying this is likely, but the possibility exists…

…Here are some things we should consider with respect to the ED-FF spread.  We should look at some of these areas for corroboration, but more importantly, to see if there are areas where we can find some cheap protection or positive expected value::   CLICK TO READ THE REST OF THIS ARTICLE FROM THE CA WEB SITE

Next Week: I uncover Trump’s Master Plan.

Other Delayed Market Comments from the CA Newsletter:

New From the Value on the Curve Section

  • Look for libor blowout protection.  Article 50 is just around the corner.

New From the News Takeaways Section

  • The US’s and China’s roles in globalization seem to have reversed.  Trump spent a lot of time in his inauguration speech discussing protecting American interests, while Xi gave a speech in Davos defending globalization.  I don’t think anyone would have expected that from the leaders of the US and China a few years ago.  Bizarro World indeed.
  • The FOMC doves are less dovish.  Yellen was out saying she and the FOMC expect to hike rates “a few” times this year.  She said allowing the economy to run persistently hot would be risky and unwise.  See the Appendix for some other Yellen thoughts.  Brainard mentioned that if fiscal policy leads to a more rapid elimination of slack, policy adjustment would be more rapid.  She also said the risks were closer to being “balanced” than they have been for a long time.  Evans (another dove) suggested 3 hikes in 2017 as being plausible.  Where did all the doves go?

Trade Summary from the Delayed CA Newsletter:

FLIP TRADE UPDATE: So many of the Flip Trades moved favorably that there is only one active trade left on the list.  But we’re on hold until we feel better about the ED-FF spread.

OFFICIAL TRADE UPDATE: I listed a few things I was looking to do the following week: (1) cheap libor protection, (2) some sort of FFX7 vs EDZ7, and (3) some 2018 steepening trade.  I didn’t pull the trigger on any of them, but clients could have if it fit their view.

Forum Update:

The most notable post from the Forum was:

I answer viewer mail on looking at the curve.  I discuss how to think about curve trades, and accounting for the year-end turn in structures.  CLICK TO READ THE REST OF THE POST ON THE CA FORUM

Let me know if you have any feedback on the format or content.
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