Monday, August 17, 2015
Dollar Libor Showing Life-Eurodollar and Treasuries Expected Weaker
Three month U.S. Dollar Libor is higher by 0.84 bps. to 0.3329%, a level not seen since October 2012. Interestingly, the funding measure has accelerated its advance over the last week after moving above 31 bps. And while any advance against a recent mark so close to zero looks impressive, it is evident that as the rate plummeted in late 2012 from above 45 bps, its pace of decline flattened when it hit 31 bps. This begs the question; should we expect 3 month Libor to accelerate rapidly to 45 bps. now that it is above 31 bps.?
Ask Fed Chair Dr. Yellen and her first response will likely be; ‘it depends on the data’. The employment report earlier this month was not so strikingly strong that a September rate hike is unanimously expected. However, it was strong enough to keep Libor rates moving higher.
Last week’s China devaluation of the Yuan caused a spirited jump in Treasuries and Eurodollar futures with an accompanying steepening of the Treasury 5-30 curve and a flattening of the Eurodollar futures yield curve. This price action was consistent with new or renewed expectations the Fed would be compelled to postpone ‘normalizing’ policy rates because of repercussions from a stronger dollar and resulting export implications. Instead, the dollar index is lower since the Yuan devaluation, though it has found some support over the last few sessions.
Treasuries and Eurodollar futures formed some impressive bearish reversal patterns on Wednesday of last week (the day after the China announcement). Many of these technical formations came at or near recent or historic prior price reversals. The location of the bearish reverse then lends some additional creditability to the formations. These ‘bearish shooting stars’ were confirmed by price action of the next session (Thursday). Similarly weak price action followed on Friday for contracts 10 years and in, although the long end of the yield curve (Bonds and Ultra’s) did a little better.
Given the above developments, expectations are for further price declines and generally higher rates with the long-end finding greater support and the Treasury curve 5’s-30’s flattening while the Eurodollar futures yield curve steepening over the first few years.