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| FED FUNDS FUTURES (November 19, 2008) Based upon the 30-Day Federal Funds futures contract for the December 2008 expiration is yielding an implied rate of .44% and currently pricing in a 100% chance that the FOMC will decrease the target rate by 50 basis points to .50% on 12/16/2008. The gap change between Long Term Treasury yields and the Fed Fund Rate can indicate growth direction. The gap increasing between the two rates may indicate slower growth may be near. |
| TIPS SPREAD (November 19, 2008) The difference in yield between the 10-year Treasury Inflation Protected Security (TIPS) and the benchmark 10-Year Treasury-Bond yield serves as an alternative for the market's implicit forecast for inflation for the next 10 years. That rate is about 91 basis points or 0.55%. The TIPS Yield should equal the yield of the Treasury bond on the same maturity minus the current core CPI rate (2.2%). However, the actual yield on the TIPS does not always equal the calculated yield. The difference is referred to as the TIPS spread, which many policymakers look at as a measure of projected inflation. That real rate is about 1.26% right now. When the spread between the yields decreases investors expect slower inflation. |
| LIBOR - OIS (November 11, 2008) LIBOR is down to 2.18% a 4-year low. It reached a high of 4.81% on 10/10/08 when equities found new 52 week lows. It was about 2.81% the day Lehman filed for bankruptcy on 9/15/08. LIBOR-OIS spread may be a worry. It has fallen to 168 basis points, which compares to 87 basis points on the last trading day before Lehman declared bankruptcy, but has averaged 11 basis points in the five years before the recent financial crisis. In the last five years before January we had just completed a 4 1/2 year bull market (03-07). Alan Greenspan stated recently that the LIBOR-OIS spread should serve as a measure for determining when markets have returned to normal. 168 basis points does not seem normal to me. |
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