‘FORWARD’ Thinking (and pricing, too…)

The ‘path of least resistance’ for rates is deemed by the popular kids to be ‘steeper and cheaper’ (ie rates going UP and the curve NOT inverting and SO … no recession) and there are countless reasons cited (tax reform leading TO better economic outcomes for everyone and oh, yeah more UST supply to fund it all). The funny thing about markets is they — as general rule of thumb — are future discounting mechanisms, no? With that in mind, here is a short — NOT BEARISH — bit from BMOs Ian Lyngen and Aaron Kohli:

…A more notable reflection of this upbeat assessment has to do with the reshaping of the OIS curve and the fact that while 2y1y and 3y1y remain inverted, the level of the OIS curve much further out has shifted higher. 5y1y for example has jumped in the past month from 2.40% to 2.60%, providing much of the fuel for the selloff. Our read on this is that the market has become a bit more accepting of a slightly higher ending point for the Fed (along with a steeper path), partly driven by the expectation of higher growth in the next few years and likely a result mostly of the expectations of stimulus showing up in data…

Oh, ok SO … this ‘good outcome’ already priced IN means that the continued barrage of ‘analysts’ beating the ‘steeper / cheaper’ drum may be driving the car lookin’ in the rear-view mirror. Here’s some 1y OIS 5yrs FORWARD thinking CONTEXT for you — perhaps this is as ‘good’ (steep/cheap) as it gets:

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