Friday, October 17, 2014

EDH6-EDH7 One Year Calendar Spread Not Respecting Fed

On Wednesday and Thursday the EDH6-EDH7 one year calendar spread traded as low as 77.5 basis points (a Tweezers Bottom) and it arguably should be trading at or above 100.   Strongly expected uneven growth cycling back and forth between Q2, 3%+ growth and trend 2.25% or slightly lower will continue to reduce the output gap and create rising wages.  Despite this greatest likelihood, the market priced less than 10 bps of policy firming per meeting through 2016.  Instead, a conservative estimate would be for a 25 basis point firming every other meeting or a spread of 100.  At some point, it should be expected that a data series will suggest that the Fed will have fallen behind the curve and will need to remove accommodation at a faster pace.   At which time, we should expect that this EDH6-EDH7 calendar spread will trade closer to 150 basis points.  Currently this spread is quoted 88.5 bid / 89 offer.   


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