Swap spread and covered interest rate parity
A deviation in covered interest parity. This is most likely due to balance sheet (B/S) constraints, and Repo agreements could reduce B/S constraints however we are not seeing that. This leads me more to the idea that the probability to see a deflation period is high, as those B/S constraints are preventing participants from the arbitrage opportunity. The inability for those swaps to decompress is also telling, and shows that most B/S have been and never recovered after the GFC. Thus liquidity is systematically impaired.

Conor Mac's avatar
Nice to see you trying out Commonstock :) Welcome.
Deer Point Macro's avatar
@investmenttalk glad to be here :)
Reasonable Yield's avatar
Interesting observation, I saw that Stanley Druck places prolonged inflation to deflation risk at 70/30.
Deer Point Macro's avatar
@reasonableyield so far I’ve been in the deflationary camp we will see if I’m right 😂