From December 1978 – September 1984, Fed Funds achieved not only the highest rates seen since 1955 to current day but Fed Funds also remained in first ever double digits from a low at 9.03 to 19.08 highs. Then began a continuous downtrend. When 11.3 broke September 84, the downtrend began to eventually experience 0.07 lows in July 2011. At the 2008 crisis, Fed Funds closed at 97 in monthly average terms and now trades at 0.38. Fed Funds at 0.38 and lows seen in the prior eight years is a first in 62 years, since at least July 1954 when Fed Funds was 0.8. What lows at 0.38 means is current Libor – OIS spread sits on the floor at 0.012.
When Yellen raised, Fed Funds lifted firmly above monthly averages from 1 – 7 years and well below the 10 year average at 1.31. Above 1.31 then next is the 15 year average at 1.63 followed by the 20, 25 and 30 year averages at 2.59, 2.96 and 3.75. The current range is found between 1 and 2 year averages at 0.13 and 0.12 – 1.31. Below, Fed Funds is well supported and only a break of 0.105 would see Fed Funds trade back to historic lows and a continued concern for a further rise as well as our economic future.
From current 0.38, Fed Funds is severely overbought from averages 1- 7 years, middle range at the 10 and 15 and slightly oversold from averages 20 – 30. The 30 year average despite oversold is not to a point of concern. Targets for averages 1- 7 years is found between 0.14 – 0.16 while averages 10 and 15 reveal targets at negative 0.65 and negative 0.21. The 20 year target is 0.27. Only the 25 and 30 year averages calculate a higher Fed Funds at 0.68 and 0.99. The 10 year minus 3 month yields reveal 0.99 while 10’s minus 2’s stands at 0.59 so targets are in line.
Overbought calculations complements significant tops seen from averages 1 – 5 years and beginning concerns at averages 10 and 15.Fed Fund cannot stand in its present 0.38 location. Ted spreads using T bills as the guide reveal 0.29 and 0.28 as Euro deposit rates. Fed funds is heading for a correction but it may not be very deep.
Brian Twomey, Inside the Currency Market, btwomey.com