Oz Didn’t Give Anything to the Tin Man

The FOMC did nothing today and the belly of the interest rate complex got severe dyspepsia. Hilsengoosed levels from last week may have upset squeezed shorts , but the decline was a revisit not aggressive new territory (yet). The really eye popping reaction came in the Land of Colored Eurodollars. "Green packs" were 35 bp lower (higher implied yield) and esoteric and seldom referenced 2018 stuff was down 50 !! In a ZIRP world a 50 net change is rarely associated with "good"-up or down.

To put it in perspective, these zero coupon-like money proxies for forward rates have gone from 98.10 (1.90) to 96.80 (3.20) since MAY 1 !. The 2014 -2015 portion of the curve is the most telling, however. For all the hype of misinterpreted Fed communications and heated macroeconomic debate, the "kink" in expectations appears exactly where Fed officials and forecasts have vocalized change to come. Taken with falling inflation metrics, and contrary to apoplectic TV commentator rants, Fed credibility is at an all time high. (A bubble may be another topic.) We would caution only that prior cycles that started with concepts of rising rates in the years to come often found themselves correct much sooner than originally planned.

The gravitational pull of the ZIRP is being tested by the centrifugal forces of economic growth and positive real yields in a Quantitative Easing Big Bang. That the 2 Bond Kings don't believe it shouldn't make you sleep easier. If they're right, things are worse than expected. If they're wrong? Look out below.

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