Wednesday, April 29, 2015
What if Fed Not ‘Off’ on ‘Dot Plot’?
We are aware that the latest (March FOMC) 'dot plot', while markedly lower in its path projection for policy rates then stated in the December (SEP), still had 125 basis point differential between year-end expected for 2015-2016. Interestingly, the spread between EDZ5-EDZ6 which trades higher by 2 bps today to 75.5 is only roughly 50 bps below the Fed projected policy rate spread. Additionally, the Fed projected difference between year-end policy rate projections for 2016 and 2017 are separated by an additional 125 bps in the same latest reporting. Not unlike the earlier noted Eurodollar calendar spread, the EDZ6-EDZ7, higher by 3 bps to 58 today, is an even greater 67 bps below the Fed projected policy rate path. Either of these Eurodollar calendar spread strategies; the EDZ5/EDZ6 (for those who see a greater and quicker 'application of normalization') or EDZ6/EDZ7 (for those who like Jan Hatzius at GS see a later and greater move toward normalizing) might be a keen addition to a portfolio. The EDZ5/EDZ7 of course combines both strategies and is available at 133.