Never Done That...
I've been riffing some thoughts around with the interest rate crowd on Twitter. The usual suspects are involved, @interestarb, @exantefactor and @davidschawel and @joshuademasi , the common thread being we are witnessing something new. We've never been here and we've never done this. For example, television pundits unencumbered by position or P/L confidently map out a reduction in LSAP activity (T_P_R..buy a vowel Vanna?) as 10-15B and no biggie, and FG will get tweaked a smidge into the 2016 forecast. it'll be fine. Unfortunately, from the term structure of forward rates perspective, that cannot be true.
As we stated earlier in the year, the historical perspective of a CB tearing down its Balance Sheet is NEVER BEEN DONE. The yield curve from 1yr to 5 years for Treasuries goes 13Bp, 41,80 (3yr)and 1.65. Somewhere between the 41 and the 80 the Fed goal of trend Employment and Inflation is achieved. The EDU15-EdU17 spread for Eurodollar futures (Moved frwrd by yesterday's IMM day expiry) is experiencing outsized buying (own the front short the back) at the 210-213 level. The spot TED remains a relic of a forgotten age while the term proxy just "mooned" Voyager out the back window as it passed it in the great unknown, a delusional practitioner might say. At the same time 12 month LIBOR set for today (our secret guide) at a new FOREVER low yield of .6516
A market maven would counsel to just sell it ride them out for convergence roll up and retire. The reality is the poor sap paying 210 on 40k today was "white flagging" just that pipe dream. So, we have this wonderful window into the future that is the forward future cash flows of a string of "zero coupons" and all we can do is look on in awe. Isn't beautiful? Sometime near 2016, all will be right with the world and the FF rate will have returned close to its "natural" home. But, as I said to Josh today, "This is a story about all the strange and scary things that happen along the way, the journey, not the destination." Spoiler alert for you would be Dorothys hopping on the path, everything you wish for you already have and the Wizard is a fraud. So have fun parsing statements and closely listening to Pasinisplations of Fed intent. I'm just going to keep staring at the truth right in front of me and wondering "Having never been here and never done this--how do we get there from here?"