Enter Sandman

Despite historic dislocations in developed economy term structures and sub-par to average growth rates, the Fed seems poised to adjust the baseline funding rate on the financial system. If the rate was an indicator of the calibration of monetary policy, then perhaps all the media discussion would be warranted. Over the last 6 months, since the first adjustment, markets and economic activity have not cratered as many predicted.

Our model would set the O/N rate around 70bp under present conditions, nearly double the prevailing 37. This common widening -and INCREASED accommodation -at this stage of the credit cycle has supported the expansion A host of geeky rates with exotic names will need to adjust behind the Fed's publicized move (should they pull the trigger). Unfortunately, because quantitative monetary policy is still the true measurement (not rate targeting), extremely tight yield relationships beyond 1 year could usher in trouble.

Eurodollar pack spreads typically over 150bp have compressed to new cycle lows. EDU17-EDU18 is a flat-lining 23bp. That's a level consistent with TV ER doctors yelling, "Clear !" Quantitative Easing is an HG Wells time machine for policy. It helps a system jump past deep disruption in the short term and screws up future history. Those kinks and folds are now apparent out on the forward curve. Attempts to adjust in either direction - narrower and they invert, wider and they cause liquidation - will cause consequential reactions.

"Sleep with one eye open - grip your pillow tight."

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