Excellent Swap Commentary

January 20th, 2016 12:31 pm | by John Jansen |

Via an anonymous market maker:

The rates markets are having a familiar start to the year.  Last January was a month of a daily grinding rally albeit for different reasons and more led by the long end.  This year has been had for rockers in their 60s, anyone with assets in the ground or in the stock market or those who believed the Fed would be initiating a series of rate hikes in 2016.  In looking back to last January the rally of early 2015 took the 1yr fwd 1yr swap rate down to 0.93%, this year the opening rally has dragged the 1y1y down to 1.035%,  Notable in this comparison is that in 2015 3 month LIBOR at the time was 25 bps, today 3 month LIBOR stands at 62 bps.  So while we are within 10 bps of the nominal yield low in 1y1y the slope between LIBOR and the 1y1y is very compressed (chart attached).  Rates markets have taken all but 1 Fed hike out over the next 14 months.  The temptation is to look for places to get short but the trouble is that the markets have been grinding not gapping and things can definitely over-shoot in the new less levered market.  These are not markets where fighting trends is a winning strategy.  Wait for a “gap” rally to signal the buying has exhausted itself.

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