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.