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Updating the Fed Funds Curve

By:

Chief Strategist at Interactive Brokers

As part of yesterday’s video about Federal Reserve Chairman Powell’s speech, I included a primer on the Fed Funds rate curve. Specifically it explained how the curve is pricing in negative rates. Markets had another trading day to digest the Chairman’s disavowal of negative rates, so I thought it important to update those findings.

The chart below shows the Fed Funds futures prices using current prices (green), yesterday’s (orange), Tuesday’s (blue) and last week’s (orange). 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.

We can see that Fed Funds futures traders are still pricing in negative rates, though the timing has been pushed back from November 2020 to April-May 2021. Interestingly, they are predicting slightly lower rates (higher prices) into 2022 than the prior estimate.

In general, the futures market remains at odds with the Fed Chairman, and implicitly tells a vastly less optimistic economic story than equity markets.

The futures market remains at odds with the Fed Chairman, and implicitly tells a vastly less optimistic economic story than equity markets.
Disclosure: Interactive Brokers

The analysis in this material is provided for information only and 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 by IBKR to buy, sell or hold such investments. 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.

Disclosure: Futures Trading

Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures, please read the CFTC Risk Disclosure. A copy and additional information are available at ibkr.com.

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