A Hopeful Session

The year spread came into Friday morning at a new low of 10.5bp. (EDM6-EDM7). 2016 opened with much ado about the Fed and this relationship around 60bp. A "normal" tightening cycle would have pushed the spread toward 150bps. Quite strikingly, the present situation is anything but "normal" let alone a "tightening cycle."

The Friday session saw the curve bear flatten. A small encouraging sign was the 5bps pop this action caused in the EDM6-EDM7 relationship, out to a whopping 15+. By comparison, the Euro based spread is -3.0bp with the legs at 100.30+ and 100.33+, respectively. As I tweeted earlier this week, "Above par and inverted is where I get off the bus." No self-respecting nation with even a marginally functioning financial system would advise or tolerate such a dystopian forward curve view.

The continuing and accelerating regulatory destruction of the CP market could continue to weigh on the term structure in STIR. The global LIBOR banks are also steady CP issuers, As that market is shackled with post crisis regulation, CP issue rates have widened steadily over T Bills. Coupled with negative rate regimes forcing breath into interbank, short tenor LIBOR sets will be pressured outward. This will make halting the Eurodollar flatlining more difficult.

Remember the mantra: Steep is Good.

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