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2yrbonds

FOMC Showdown Poised to Ignite a Surge in Yield SpreadsWith inflation finally cooling and the Fed signaling rate cuts, it seems relief is on the horizon—until you look at the job market. As recession risks grow and Treasury yields falter, a steepening yield curve presents a compelling opportunity. Positioning in the yield curve ahead of the FOMC meeting offers a more measured way to navigate the uncertainty. COOLING CPI SIGNALS GREEN LIGHT FOR RATE CUTS This week’s inflation report showed headline CPI cooling to 2.5%, the lowest since February 2021. With this release, inflation has finally fallen decisively below the stubborn 3% mark and is now just 0.5% above the Fed’s target range. PCE inflation reflects similar levels, likely giving the Fed the signal to start cutting rates. JOB MARKET REPRESENTS MATERIAL RECESSION RISKS Recent job market data suggests it may be too soon to declare a soft landing. The labor market is significantly weakening, and with household savings dwindling and credit delinquencies increasing, conditions may worsen before improving. U.S. economic data from the past week indicates that the labor market is in a precarious situation. The August JOLTS report showed job openings dropping to their lowest since early 2021, reflecting decreased labor demand, while unemployment edged up slightly. Additionally, the August jobs report revealed a modest gain of 142,000 non-farm jobs, falling short of expectations, with downward revision for July bringing those figures down to just 89,000. As covered by Mint Finance previously a recession is likely to lead to a sharp steepening of the yield curve. We covered average levels of the yield spread at the start of recessions in detail previously, but in summary with the current 10Y-2Y spreads at 15 basis points, there may be up to 85 basis points of further upside in the spread. TREASURY YIELD PERFORMANCE Despite a short recovery following the ominous jobs report on 2/August, Treasury yields have continued to decline. Unsurprisingly, short-dated treasuries have underperformed as 2Y yields are 27 basis points lower, while 30Y yields have only declined by 12 basis points and 10Y by 15 basis points. Overlaying yield performance with economic releases, the largest impact on yields over the last few months has been from FOMC releases and non-farm payrolls while performance around CPI releases has been mixed. Potentially suggesting traders are more concerned about recession risk than moderating inflation. OUTLOOK FOR SEPTEMBER FOMC MEETING Source: CME FedWatch FedWatch currently suggests that a 25 basis point rate cut is more likely in the upcoming FOMC meeting scheduled on September 17/18. However, probabilities of a 50 basis point rate cut are also relatively high at 43%. Source: CME FedWatch While the odds of a 25 basis point cut have remained in majority, the 50 basis point cut has been uncertain with probability shifting over the past week. FOMC meetings have driven a rally in yield spreads over the past year. With FOMC meeting slated for next week, it is interesting to note that performance in yield spread prior to meetings has been more compelling than performance post-FOMC meeting. Over the last 5 meetings, pre-FOMC meetings, the 10Y-2Y spread has increased by 4 basis points. Performance is even more compelling in the 30Y-2Y spread which has increased by an average of 13 basis points. AUCTION DEMAND FAVORS 10Y Recent auction for 10Y treasuries indicated strong demand with a bid/cover ratio of 2.64, which is higher than the average over the last 10 auctions of 2.45. Contrastingly, the 30Y auction was less positive with a bid/cover ratio of 2.38, below the average of 2.42. 2Y auction was sharply weaker with a bid/cover of 2.65 compared to average of 2.94. Auction uptake suggests higher demand for 10Y treasuries than 30Y treasuries and fading demand for near-term 2Y treasuries. HYPOTHETICAL TRADE SETUP Recent economic data has made an upcoming rate cut nearly certain. However, the size of the cut remains unclear. CME FedWatch currently indicates a 42% probability of a larger 50-basis-point cut, driven by the recent CPI report and weak jobs data. With rising recession risks, the Fed might opt for a larger rate cut. However, if they choose a moderate 25-basis-point cut, market sentiment could stabilize. Historically, yield spreads around FOMC meetings suggest that positioning before the meetings tends to be more advantageous than after. This is especially relevant now, as moderating sentiment from a 25-basis-point cut could trigger a temporary reversal in yield spreads. Considering the underperformance of the 10Y-2Y spread in September and increased auction demand for 10-year Treasuries, a long position in the 10Y-2Y spread may be the most favorable strategy for gaining exposure to the steepening yield curve. Investors can express views on the yield curve using CME Yield Futures through a long position in 10Y yield futures and a short position in 2Y yield futures. CME Yield Futures are quoted directly in yield with a 1 basis point change representing USD 10 in one lot of Yield Future contract. This makes spread calculations trivial with a 1 basis point change in spread representing PnL of USD 10. The individual margin requirements for 2Y and 10Y Yield futures are USD 330 and USD 320, respectively. However, with CME’s 50% margin offset for the spread, the required margin drops to USD 325 as of September 13, making this trade even more compelling. A hypothetical trade setup offering a reward to risk ratio of 1.46x is provided below: Entry: 14.2 basis points Target: 35 basis points Stop Loss: 0 basis point Profit at Target: USD 208 (20.8 basis points x 10) Loss at Stop: USD 142 (14.2 basis points x 10) Reward to Risk: 1.46x MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme . DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
CBOT_MINI:10Y1!Long
by mintdotfinance
Macro Monday 58 - Recession Warning Charts Worth Watching Macro Monday 58 Recession Charts Worth Watching If you follow me on Trading view, you can revisit these charts at any time and press play to get the up to date data and see if we have hit any recessionary trigger levels. They are very handy to have at a glance. CHART 1 10 - 2 year treasury yield spread vs U.S. Unemployment Rate Subject chart above Summary ▫️ The chart demonstrates how the inversion of the Yield Curve (a fall below 0 for the blue area) coincides with U.S. Unemployment Rate bottoming (green area) prior to recession onset (red areas). ▫️ The yellow box on the chart gives us timelines on how many months passed, historically, before a confirmed economic recession after the yield curves first definitive turn back up towards the 0% level (also see circled numbers showing connecting bottoming unemployment rate). ▫️ Using this approach, you can see that the average time frame prior to recession onset is 13 months (April 2024) and the max timeframe is 22 months (Jan 2025). ▫️ This is only a consideration based on historical data and does not guarantee a recession or a recession timeline however it significantly raises the probability of a recession, and the longer into the timeframe we are the higher that recession probability. ▫️ We typically we have a recession (red zones) either during or immediately after the yield curve moves back above the zero level. At present we are at -0.08 and fast approaching the zero level which is one of the most concerning data points of this week. ▫️ The unemployment rate moved from a low of 3.4 in April 2023 to 4.3 in July 2024. This is a significant increase and is typical prior to recession onset. Conclusion ▫️ If both the 10 - 2 year treasury yield spread and the U.S. Unemployment Rate continue in their upwards trajectory in coming weeks and months, this is a significant risk off signal and recession imminent warning. ▫️ The Sahm Rule triggered this week which has been one of the most accurate indicators of a recession starting. It is triggered when the three-month moving average of the U.S Unemployment Rate above rises by 0.50 percentage points or more, relative to its low over the previous 12 months. The Sahm rule triggering adds to recession concerns, however the designer of the rule has stated that I may not be accurate factoring in recent events like COVID-19 which has thrown unemployment and economic data to extremes. What is the 10-2 year Treasury yield spread? The 10-2 year Treasury yield spread represents the difference between the yield on 10-year U.S. Treasury bonds and 2-year U.S. Treasury bonds. It’s calculated by subtracting the 2-year yield from the 10-year yield. When this spread turns negative (inverts), it’s significant because it often precedes economic downturns. An inversion suggests that investors expect lower future interest rates, which can signal concerns about economic growth and potential recession. In essence, it’s a barometer of market sentiment and interest rate expectations What is the U.S. Unemployment Rate The unemployment rate is calculated by dividing the number of unemployed people by the total labor force in the U.S (which includes both employed and unemployed individuals). CHART 2 Interest Rate Historic Timelines and impact on S&P500 Summary ▫️ This chart aims to illustrate the relationship between the Federal Reserve’s Interest rate hike policy and the S&P500’s price movements. ▫️ This is obviously pertinent factoring in the expectations of a rate cut in Sept 2024. This chart which I shared in Sept 2023 may have accurately predicted this likely Sept 2023 interest rate cut but is this positive for the market? ▫️ Interest Rate increases have resulted in positive S&P500 price action ▫️ Interest rate pauses are the first cautionary signal of potential negative S&P500 price action however 2 out of 3 pauses have resulted in positive price action. The higher the rate the higher the chance of a market decline during the pause period. ▫️ Interest rate pauses have ranged from 6 to 16 months (avg. of 11 months). ▫️ Interest rate reductions have been the major, often advanced warning signal for significant and continued market decline (red circles on chart) ▫️ Interest rates can decrease for 2 to 6 months before the market eventually capitulates. ▫️ In 2020 rates decreased for 6 months as the market continued its ascent and in 2007 rates decreased for 2 months as the market continued its ascent. This tells us that rates can go down as prices go up but that it rarely lasts with any gains completely wiped out within months. Conclusion: ▫️ Rate cuts should signal significant concern as most are followed immediately by recession or followed by a recession within 2 to 6 months of the initial cut. This is high risk territory. ▫️ During the week I seen the 2 year treasury bill which matches closely the Federal Reserve interest rate cycle. The spread developing between the two suggests rate cuts are imminent. Remember point one above. The chart below: CHART 3 Relationship between 2 Year Bonds and Interest Rate ▫️ Very briefly, you can see the red areas where gaps formed when the Federal Reserve interest rate was lagging behind the 2 year treasury bonds declines. ▫️ Currently there is a large gap of 1.74% between the two data sets. The last time we had gaps like this were prior to the 2000 and 2007 recessions. Even prior to COVID-19 you can see the Federal reserve was playing catch up. What to watch for in coming weeks and months? ▫️ If both the 10 - 2 year treasury yield spread and the U.S. Unemployment Rate continue in their upwards trajectory in coming weeks and months, this is a significant risk off signal and recession imminent warning. ▫️ Since 1999 the Federal reserve interest pauses have averaged at 11 months. July 2024 is the 11th month. This suggests rate cuts are imminent. ▫️ The 2 year bond yield which provides a lead on interest rate direction is suggesting that rates are set to decline in the immediate future and that the Fed might lagging in their rate cuts. Furthermore, rate cuts are anticipated in Sept 2024 by market participant's. ▫️ Finally, rate cuts should signal significant concern as most are followed immediately by recession or followed by a recession within 2 to 6 months of the initial cut. Yet the market appears to be calling out for this. This is high risk territory. Combine this with a treasury yield curve rising above the 0 level and an increasing U.S. unemployment rate and things look increasingly concerning. We can keep any eye on these charts for a lead on what might happen next. I will be reviewing some other charts over coming days around jobless claims and ISM figures to see how positive and negative we are looking. PUKA
FRED:T10Y2Y
by PukaCharts
4
Is the 2y bond telling us something? HAS THE CRASH BEGUN?Bonds yields have been moving up at a fast pace recently - the 2 year bond yield moved between may and now nearly a full percentage point. Currently at the levels seen around 2008 right before the markets crashed. With real rates on the 3 Month bill actually reaching the exact rate before 08 crisis. One thing I noticed is that the longer end of the curve, i.e bonds with longer maturity have risen at a faster pace as well in the recent weeks. Hedge funds put massive bets in the last few weeks that yields would go higher ( shorting bonds) and I wonder if higher bonds pushing for higher rates is what may be the trigger that puts us into a recession and I do think into a real crash in the stock market. What do I mean? I think that the market has realized that inflation has been going down in many areas as shown month after month on the CPI, PCE and such reports. Although, there are still many areas where inflation exists and does not seem to be going anywhere, such as real estate, energy, and even food. Another big factor here is loan payments, mortgage payments, that people are paying on cars, houses, etc. So people are not saving, people are taking more and more credit as shown recently that we are currently at record levels of credit card debt and the lowest rate of savings in over a decade. The optimism in the market since the start of the year, was so that the market started to be ok with the fact that rates would be going to around 5%-5.5%, and even pricing in rate cuts during 2024- as we all know, the markets are forward looking, so equity prices started moving higher. But after all this, we have reached a point where the market is questioning valuations when we have a good return in "risk free" assets, and with so much concentration in a handful of names bringing great companies at trillions of dollars of market cap but with no where near a reasonable price relative for the risks. Not to mention the soft earnings, yes we beat expectations, but is it really hard to beat such low expectations? if you look at earnings in compared to a year ago you will see that there is hardly any growth and even no growth and lower sales. Back to Bonds- why would yields go up? Fitch downgrading the US credit market is one reason, but not at all the whole story. Sticky inflation could another reason. One major one which I think has been forgotten recently, is the banks. Reginal banks and even more larger banks have on their balance sheets loads of us treasuries, when SVB and First republic collapsed, it showed how fragile the banks are to rising yield rates on the securities they hold. Now that is is happening again, and this time along with longer maturity securities, I think there may be a real crisis waiting to unravel. Perhaps bringing dozens of banks to the brink of collapse. This is something that would be to great for JP Morgan or any other major bank to buyout and save by themselves. On another note The market is showing its concern, for fiscal issues, real problems with the US paying over a trillion Dollars a year just on interest payments. Less income on taxes and much more spending due to inflation. I think the current environment is screaming a lack of trust and wants real returns for the risks in takin on more US debt, so rates are going up. How much higher can yields go without something breaking? I think the 30y mortgage rate at 7%+ currently is going to be another breaking point. Without going to further in the housing market, I will just note that with rent prices at all time highs in many cities, could be a signal that home owners are trying to get a yield on their investment that can cover their mortgage expenses which are rising. Putting the expense on the renter. When it reaches a level where renters cannot pay these amounts that's when owners cannot keep their homes, selling starts. Home owners seeing rates rising ( 10Y bond is the best indicator as most Mortgage brokers use that to calculate rates ahead) can start to panic and sell. So I do think that if there will be a total crash it will happen simultaneously in many markets and will obviously cause major panic and mayhem. This time the Fed wont be able to do much, printing money will be seen as a major fiscal risk and may cause the end of the dollar all together, inevitably a major correction will be needed to reset financial valuations and restore confidence in the debt markets. To summarize, there are definitely cracks, and real risks that seem to outweigh the current reward in the equity markets..
TVC:US02YShort
by LEO_IAMNOTUNCERTAIN_55555
1
The yield curve has inverted, how to overcome this?Content: • Difference between interest rate and yield? • Why it is important to note of yield curve inversion? • How to tell when Yields are inverted? • What is the long-term trend for interest rates and yields • How to manage a rising yield? Disclaimer: • What presented here is not a recommendation, please consult your licensed broker. • Our mission is to create lateral thinking skills for every investor and trader, knowing when to take a calculated risk with market uncertainty and a bolder risk when opportunity arises. 1. Difference between interest rate and yield? i. Interest rates are a benchmark for borrowers and ii. Yields are for lenders. For eg. investors to the U.S. government iii. Both interest rates and yields move in tandem together 3. Why is it important to note yield inversion? i. For eg. - when the return on a 30-years yield is lower than the 2-year yield, that indicates a ii. For lenders or investors – a pessimistic outlook, a reluctance to commit their money to the longer-term bond, they prefer short-term deposits as the market is unclear in the long-term. iii. For borrowers – most individuals or companies have shorter-term borrowing, for eg a 2 years fixed rate or a bridging loan. When the yields are inverted, suddenly they find them paying more on interest rates repayment. Since interest rates and yields move in tandem, expect the shorter-term lending rates to go higher. This will hurt companies and individuals who have higher leverage items on their books. If you are into shorter-term trading, do look into the market with live feed data. I am starting an inflation series, in the next video tutorial, we will discuss why inflation is happening not just in U.S. but all around the world. Micro 10 Years Yield Futures 0.001 = US$1 3.488 = 3488 x US$1 = US$3,488 3188 to 3488 = 300 x US$1 = US$300
TVC:US02Y
by konhow
2yr & 10yr Bond with M1Nothing to be concerned about here... if you're an ostrich. Inflation spiraling out of control, while bonds reflect the loosest monetary policy possible with a dovish Federal Reserve hand-wringing about tanking the markets. M1 has gone beyond parabolic, practically vertical. The Fed communicated this week that they will try and control future prices but they're not going to do anything to reign in current "transitory" prices. Fed Chair Powell "hopes" history will say the current regime got this under control when replying to Senator Shelby in congressional talks this week... to which Shelby replied their actions to this point indicate otherwise.
TVC:US10Y
by R0MM3LL