Dec
1
George Zachar contributes to the Fixed Income Department
December 1, 2006 |
A twenty year inversion is what the forward swap curve is ‘predicting’ according to the humble gif. below. Starting 10 years from now, the forward swap curve becomes increasingly inverted, with 30 year rates below 2 year rates.
Of course, this relationship is an arbitrage artifact partially explained by the thin trading conditions in long-dated 30 year swapland. Nonetheless, folks who mechanistically claim “market prices” to be forecasts should be asked to explain what this means. A certain cohort whose offices face the Mall in Washington comes to mind.
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