Assessing Recent Dynamics in the World of Vol
Alpha Exchange
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The Fed's Near-Term Forward Spread
The Fed's preferred way of looking at this is what they call the, quote, near-term forward spread. In early May, market prices implied a 220 basis point decline in the three-month rate out 18 months. We might characterize this curious pricing as some statement that the market was embedding a premium for accident insurance. By late 2022, this correlation was actually negative 50%.
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