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(Not so) Negative Talk from the Fed

By:

Chief Strategist at Interactive Brokers

Steve Sosnick, Interactive Brokers’ chief strategist, discusses the Fed’s recent remarks such as the topic of negative rates. That area may give some insight into bank stocks performance and Fed funds.

Produced on May 13, 2020

I reference this chart below in the accompanying video. It displays the Fed Funds futures curve. As with other fixed income instruments, higher prices reflect lower yields. In the case of Fed Funds futures, they are quoted as a percentage of the face value of the contract. The yield is the difference between 100 and the specific futures price, annualized.

If one is paying more than 100 for a future, you would be receiving less in the future than you pay today. That implies a negative yield.

The green line at the top is the current pricing of the Fed Funds futures on the Chicago Board of Trade. You can see that the line is poised at 100 in September, which implies a zero interest rate, and remains above par throughout 2021. The orange line in the middle shows yesterday’s levels, so we can see that the yield implications barely budged since yesterday. The bottom blue line shows the pricing from last month. It shows that even despite the record amounts of Fed accommodation that became apparent in early April, markets have come to expect even more.

Fed Funds 2020
Disclosure: Interactive Brokers

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