1 Year Rates

Bonds are the Pam Anderson of rate products. They both still turn heads when moving in public but only to ignite tales of glory days past.  Short rates are always this year's "it girl." Term structures should reflect 1 year projections stacked onto each other. As such, the Eurodollar contract remains a beautifully designed product.

The relationship between Sept. of 2011 and Sept. 2012 has retreated to the 79-80 level. The strong rally in the belly has not imploded spreads behind 2012, however. "Red-Green" spreads for Sept. are a robust 111bp. This is a "goodly" amount of roll with the 2-10 cash curve at 2.65. More importantly, the futures market is still adjusting to deteriorating economic growth scenarios. The dollar , and precious metals, have highlighted inflationary fears. The term structure has reached an inflection point on economic momentum. The employment report gains importance in this tone.

Finally, gas hit $4.45 for 87 grade in the Chicago suburbs today, another robust new high. Business owners/managers responded to my tweet this morning that they want/need to raise prices but gasoline moves too quickly and shockingly in front of them. This raises the question, if energy costs were to subside on the above discussed concerns, would core priced goods be moved up in response to the correction? Before we will know, the headline reports will most likely be pushing the upper band of "acceptable" for CBs and notes. Many have termed this classic stagflation. As we have said before, we don't believe in the Phillip's Curve so it's hard to grasp a backward sloping one. In any event, the phase, in the new buzzword for analysis, would be "transitory." What we are transitioning toward is what forward rates are struggling with right now.

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