Sometimes it is easier to have a sense of what will not happen, rather than a view of what will happen.
1. No Negative Rates In US
Nearly every Federal Reserve official has argued against the deployment of negative in the US. It is also not completely clear that the same Congressional authorization to allow the Fed to pay interest on reserves is sufficient to take-away reserves as negative rates imply. Yet the fed funds futures strip beginning next May indicate a negative average effective funds rate. With surveys consistently showing that primary dealers and economists accepting the official comments at face value, it appears to be a bit of an anomaly. The most compelling argument links the negative rates to the demand for hedges, especially by those who swapped floating for fixed rates (businesses?) and those who had that legacy exposure (banks?). Initially, we expected it to be arbitraged away apparently the 7.0-7.5 bp in ten months is not sufficiently…