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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (5305)	12/18/2001 10:17:09 AM
From: Henry Volquardsen	1 Recommendation Read Replies (2) \| Respond to of 33421

Hi John, interesting question re inverted curves. For inversion in response to purely economic factors I would probably say you are right about the US being inverted the longest. But don't forget that in the years leading up to the establishment of the Euro a number of European currencies were inverted for a long period. Take Italy as an example; with two years to go to creation the money market curve traded at the higher rates appropriate for the lira while the longer term rates started to factor in a conversion to the ECU rates. This created an inverted curve, but for political not economic reasons. I started on a trading desk in late 79 so I lived through that volatility. As far as managing a swap book, I did that in the 80s when European rates were just as volatile short term. The magnitude of the oscillations is less significant than the frequency. Managing in that environment could be done. In fact I'll contend it was pretty easy. Interbank swap spreads were as wide as 10 bp. The market volatility kept spreads wide so it gave a market maker plenty of room to maneuver. In the calmer markets spreads collapsed. Dollar spreads have gotten down to a fraction of a basis point. Absolutely no room to maneuver and no margin for error. Ask any sailor, you need a wind at your back to get moving. No wind and you are just stuck.