Libor setting likely to converge DOWN to future’s rate
December 31, 2019
–Happy New Year!!!
–First a bit of local news. Illinois continues to lose population for the 6th year in a row, down 1.2% in the past decade, as new taxes and fees continue to be imposed in an attempt to stem the tsunami of upcoming public pension fund failures. On the other hand, recreational weed will be legal in the new year. That ought to fix it.
–Big moves yesterday included new highs in many measures of the curve. 2/10 hit a new high for the year at 32.6, up nearly 4 bps. 5/30 gained 3.4 bps to 66.8 (hi of year has been 80) and red/gold euro$ pack spread was up 3.25 to 30.875. Front euro$ contracts rallied as the turn is now in the rearview mirror. Yesterday’s 3-month libor setting which was past the turn (T+2) was 1.90938%, suggesting significant convergence to EDF0 which settled +2.5 at 9818.5 or 1.815%. In this case, it appears as if the libor setting is likely to drop to meet the futures price rather than the other way around. I draw this conclusion both because EDF0 is currently even higher at 9819.5 this morning, and because there is selling of the EDH0 9825 straddle at 7.5. EDF0 settles January 13.
–Expectations of ease next year are being wrung out of the market. FFF0/FFF1 settled -18.5. High print has been -16.0 recently, and it traded -17.0 yesterday, so there is less than one 25 bp cut priced for the year. There seems to be pervasive concern that stocks could see a pullback from these levels. Even yesterday’s modest selling in equities sparked a bid from lower levels in fixed income.
