On the Slope

Many are taking the view that low rates are the result of virtually any debt/deficit scenario. The slope of the forward curves has been our focus over the paltry yields. Although the Treasury curve remains steep in the US, the money market futures curve has flattened markedly. (The EDZ11 - EDZ12 spread hit a new low this a.m. at 29bp) Bond curves in Europe are dangerously twisted from the crisis.
This situation indicates to us that the growth prospects over the medium term have deteriorated. The big investment banks continue to reduce their GDP forecasts down toward our nominal 5 year Treasury indicator. The obvious risk is in the continued anticipation of second half pick up. Futures relationships now price that event as low probability (and thus are good sell bets for those who still look for a growth pop). We are not convinced, as yet. After a long period of skepticism, the concept of "extended period" has manifested itself in term structures under the cloud of an attenuated malaise.

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