It wasn’t all that long ago when the media began to fill itself up with one story after another about how huge looming inflationary pressures were causing the entire “market” to rethink its lengthy and determined anti-reflationary stance. Back in March, for instance, S&P had joined this chorus by zeroing in on eurodollar futures, of all instruments, and coming back with rate hikes out of them.
Recent trading in the Eurodollar and Fed Funds futures markets, which both track short-term interest rate expectations, along with a run-up in the five-year Treasury note yield, show that investors believe rising inflation during the post-pandemic economic recovery will trigger the Fed to prematurely abandon its policy of keeping rates at or near 0%.
No, no, no. This was – and remains – either blatantly false or intentionally obfuscating. Relative changes in curves like eurodollar futures demand accounting for all its dimensions; not just in which direction it might be moving at any time as well as through time, but intensity, too, along with nominal placing. What the eurodollar futures curve at its lowest point (August 4 last year) had indicated was only trouble in the near-term building up to what was almost certainly a bleak intermediate and even longer-term (if there is much predictive power out past the greens and blues in the golds and purples). Thus, that nearly axis-constrained curve shifted during reflation, especially after early January 2021, to price a couple fewer permanently awful scenarios out of thousands of possible permutations. To put it into S&P’s terms, what the market actually suggested was that rate hikes by the end of 2022 were no longer impossible; that didn’t make them in any way probable. Quite the contrary, as you can see when taking account of more than just contract price direction. Factoring curve nominals relative to history, recent and long term, that’s all it ever was. Like the last time we did this inflation hysteria, “they” are all purposefully searching for the tiniest of molehills to make into mountains. And with eurodollar futures, tiny really does apply here.