Yellen a hawk? Who knew?

Yellen delivers steeper yield curve

Janet Yellen’s first post-meeting press conference went without a hitch in Washington. Her analysis was well delivered and succinct and she was rarely lost for words. She told WSJ Fed-watcher Jon Hilsenrath not to dwell on the mercurial upward drift in forward-looking predictions from committee members for the pace of interest rate increases. Indeed CNBC’s Steve Liesman put an important point to Ms. Yellen by asking her to connect the dots from the time the tightening started to the consensus longer-term projection. Ms. Yellen clarified with the point made that the glide-path would indeed by very shallow.

And while that might have issued notice to soften the yield curve the bond market took the entire discussion entirely differently. Rather than breathing a sigh of relief during the presser, bonds sold off as did the Eurodollar futures curve leading to significant steepening of the yield curve. Below is a chart displaying the gradient of the yield curve starting from December 2014 through December 2015. The spread was priced at 65 basis points before the FOMC announcement and surged to 83 bps during the discussion.

The selling pressure at deferred interest rate contracts in Chicago seems to reflect the view that fixed income investors are more concerned over a faster timetable for rising rates. Rather than being soothed over the knife-edge situation facing inflation – Yellen was quick to level the conversation on inflation by quickly shifting to include deflation in the same sentence – the market is confused over potentially faster progress in the labor market. Based on what Ms. Yellen said at her first meeting, there are no grounds to expect a hastening in the timetable to change the fed funds rate.

Chart – Steepening in the Eurodollar calendar spread     


About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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