Curve flatteners the order of the day for fixed income

October 14, 2014 05:52 AM

Fears for tighter monetary policy in both the UK and the United States reached boiling-point during the second and third quarters.

On display below is the gradient of the yield curve reflected in 3m-interest rate contracts starting in March 2015 through the following 12-months. The higher the spread, the steeper the curve and thus the money market is more fretful over the magnitude of rate increases from the respective central banks. The sudden collapse in investor confidence in the global outlook and accompanying turnaround in fears for interest rate increases have flattened out the two yield curves. Short sterling prices traded on London’s Liffe exchange have surged more so at further maturities, while the same is true for Chicago-traded Eurodollar futures contracts traded on the CME. You can see the dramatic curve flattening for both countries.

For the UK the March’15/March’16 calendar spread of 53bps is the flattest in 15-months and is down from 94bps in the summer. The Eurodollar curve has flattened by around 30bps in a matter of days as stocks wilt and traders push out fears that the FOMC will tighten anytime soon.  

Chart shows British and U.S. forward curves have slumped on global growth fears.

About the Author

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.