The last time the March 2021 Eurodollar (EDH1) was trading at 99.80 was in the first half of May when the prospect of negative interest rates was a dominant market theme.
With the recent virus spread, the risk of prolonged social distancing has increased significantly. This is leading investors to ask what part of the “alphabet” is the economic recovery now in – U, V, W, etc.?
One way to answer that question is to marry what the Federal Reserve forecasts and what the US 10yr Treasury yield is implying.
Very recently, the Board of Governors of the Federal Reserve released a paper called: Assessment of Bank Capital during the Recent Coronavirus Event. In this paper, the Fed shows the type of recovery scenario and what 10yr US Treasury yield that shape is associated with.
For example, 10yr US Treasury yields are telling you that sentiment is at the bottom of the “U” shaped scenario and 5 bps away from entering the “W” scenario.
Why do you have to pay attention to this simple framework? Because after sucking investors back into risk assets over the last 45 days, a “W” shaped scenario is maximum PnL duress.
Disclosure: Interactive Brokers
Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.
This material is from Rareview Macro and is being posted with permission from Rareview Macro. The views expressed in this material are solely those of the author and/or Rareview Macro and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.