approaching policy error territory (DB)
This is NOT endorsement of concept we’re on verge of Q4 2018 experience … In other words, it is different this time.
That said, current front end pricing and curvature produce SOME research and analysis which you may find interesting … DB just wrote it up in this way
While rates market is screaming policy mistake to rate hikes in the middle of the omicron episode, the most recent narrative argues that inflation poses higher risk than job loss for the households. In addition, there is a possibility that deepening of the most recent COVID mutation could exacerbate the inflation trend as further escalation of the pandemic could result in more severe constraints on labor supply than on its demand. All these factors are adding strong political bias to the mix which is likely to remain supportive for even more unconditional hawkishness of the Fed. Given the ample empirical evidence that in recent years politics have become more of a complication than a solution, it is not at all surprising that the market is expressing a high degree of skepticism regarding the effectiveness of this recent twist in monetary policy …
... The curve is already preparing for this scenario. Its current flatness is consistent with the advanced stage of the tightening cycle. Green/Blue spread has been residing in the policy mistake territory for over a week (Figure). Red/Green and Green/Blue spreads are generally a mirror image of each other, reflecting the logic of optimal control. The two spreads widen during the easing cycles and compress during the tightening pinching the x-axis towards the end of rate hikes, practically never trespassing that boundary. The inversion on either side (typically Blues/ Greens) is a sign of market’s statement of policy mistake.
... Q4 2018 all over again? You decide.