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

To: OX who wrote (5463)	1/26/2002 7:26:03 AM
From: Henry Volquardsen	Read Replies (2) \| Respond to of 33421

ABSOLUTELY!!! this one has always been a pet peeve of mine. A normal yield curve with no expectations of interest rate moves one way or another is going to be positively sloped. It is going to reflect time premium. A slope of 25 to 50 basis points between 3 month and 1 year rates would reflect a neutral sentiment. If there is a similar slope between 1 and 2 year rates that would generate a front red ED as much as 100 bp+ higher than the front ED. And this is before taking into account convexity which will start to depress the reds by a few bp. So yes there was a closing differential of 217 bp point between March and red March but up to half of that would be expected in a neutral curve. Also I have a philosophical disagreement with the notion that forward derivative prices, which is all the ED futures are, reflect market expectations. It was not that long ago that there was considerable academic debate about whether forward currency rates predicted market expectations of currency movements. To me the forward curve as a predictor of rate expectations is along the same line. Forward rates do not exist in and of themselves. They are merely derivatives that fall out of cash prices. There are rate expectations influences on cash but they are far from the sole determinant of curve relationships. Fwiw history shows the forward curve is a poor predictor. The curve generally remains way to steep while the Fed is cutting as the market tends to lag the Fed. And once the Fed begins to tighten curves, at least initially, the curve is generally to shallow.

To: OX who wrote (5463)	2/7/2002 9:37:25 PM
From: John Pitera	Read Replies (2) \| Respond to of 33421

Hi OX, I was away when you posted this but you've got a great point. there is no doubt a cost-of-carry on the 1 year eurodollar curve, with our present yield curve slope. Henry's response was excellent as well. you know It looks like the Nikkei fell below the DJIA, on Feb 1st it looks like. That's the first time that the Nikkei has been lower than the DJIA in maybe 20 or 25 years. I'm not even sure when they were last at price parity Nikkei, 01/15/02 103.594 102.080 10208.0 01/16/02 102.690 100.963 10177.5 01/17/02 102.575 100.745 10128.2 01/18/02 102.967 101.514 10293.3 01/22/02 102.803 100.509 10050.9 01/23/02 101.548 100.409 10040.9 01/24/02 102.404 100.128 10074.0 01/25/02 101.498 100.174 10144.1 01/28/02 103.037 101.562 10220.9 01/29/02 101.917 100.260 10026.0 01/30/02 99.383 98.431 9919.4 01/31/02 100.121 100.121 10012.1 02/01/02 100.322 97.350 9791.4 lower close than 9907 02/04/02 98.098 96.240 9631.9 02/05/02 96.839 94.734 9475.6 02/06/02 96.025 94.208 9420.8 DJIA: 01/15/02 9892.730 9986.210 9865.610 9924.150 01/16/02 9916.540 9916.540 9711.100 9712.270 01/17/02 9712.210 9857.790 9712.210 9850.040 01/18/02 9830.940 9830.940 9738.430 9771.850 01/22/02 9772.340 9842.840 9696.570 9713.800 01/23/02 9710.960 9773.370 9680.510 9730.960 01/24/02 9734.210 9856.970 9734.210 9796.070 01/25/02 9793.230 9897.850 9755.110 9840.080 01/28/02 9843.050 9894.530 9798.560 9865.750 01/29/02 9865.540 9908.160 9616.650 9618.240 01/30/02 9619.140 9775.590 9529.460 9762.860 01/31/02 9763.200 9922.490 9763.200 9920.000 02/01/02 9923.040 9943.940 9860.690 9907.260 02/04/02 9905.460 9905.460 9677.540 9687.090 02/05/02 9684.740 9773.720 9603.990 9685.430 02/06/02 9682.040 9733.100 9608.210 9653.390