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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
One Chart to Rule them All ~ 10Y/2Y and 10Y/3M Yield Spreads10Y/2Y and 10Y/3M Yield Spread One chart to rule them all. I have combined the 10Y/2Y Yield Spread (purple line) and the 10Y/3M Yield Spread (blue line) onto one chart. You can get updated readings on it at anytime on my TradingView page (link in bio above) I have measured the historic timeframe from un-inversion to recession for both datasets. Un-inversion occurs when the yield spread rises back above the 0 level. Given the 10Y/2Y Yield Spread has just un-inverted (moved above 0), I thought this a worthy exercise. The findings are interesting and useful. Main Findings / Trigger Levels The findings are based on the last 4 recessions (this as far back as the 10Y/3M Yield Spread chart will go); ▫️ Before all four recessions both yield spreads un-inverted (only one has to date); - At present only the 10Y/2Y yield spread has un-inverted (2nd Sept 2024), thus we can watch for the next warning signal which is an un-inversion of the 10Y/3M yield spread. Without both yield spreads un-inverting the probability of recession is reduced. ▫️ The 10Y/2Y typically un-inverts first and the 10Y/3M un-inverts second. -Historically the delay between the 10Y/2Y and the 10Y/3M un-inversion is between 3 to 10 weeks (23rd Sept – 11th Nov). This is the date window that we can watch for a 10Y/3M un-inversion (based on historic norms). -If we move outside this window beyond the 18th Nov with no 10Y/3M un-inversion, then we are outside the historic norms and something different is happening. Nonetheless watching for the un-inversion of the 10Y/3M after this date could be consequential. ▫️ On the chart I have used the last four 10Y/2Y yield spread un-inversion timeframes to recession and created a purple area to forecast these from the recent the inversion on the 2nd Sept 2024 forward (Labelled 1 - 4). This creates a nice visual on the chart. Based on these historic timeframes and subject to the follow up 10Y/3M un-inversion confirming in coming weeks, the potential recession dates are as follows (also marked on chart); 1.28th Oct 2024 (based on 2000 10Y/2Y un-inversion to recession timeframe) 2.03rd Feb 2025 (based on 2020 10Y/2Y un-inversion to recession timeframe) 3.12th May 2025 (based on 2007 10Y/2Y un-inversion to recession timeframe) 4.25th August 2025 (based on 1990 10Y/2Y un-inversion to recession timeframe) ✅ Remember, you can check in on this chart and press play to get updated data at any time by clicking the link in the comments below or by following me on TradingView👍 ▫️ I will include a table in the comments which outlines all of the above metrics with dates. I will also share a chart with a zoomed in version of present day so that all the above trigger dates can be more closely monitored. Finally, it’s important to recognize that these findings and trigger levels are based on the last four recessions. There is no guarantee that a recession will occur or occur within the set trigger levels. What we have is a probabilistic guide based on historic patterns. This time could play out very differently or not play out at all. Regardless, all of the above findings help us gauge the probability of a recession with historic timeframes to watch. It leaves us better armed to make the necessary risk adjustments, particularly if the 10Y/3M yield curve un-inverts. Price is king, and at present, prices are pressing higher on most relevant market assets. From the above findings and the current positive market price action, it appears we have a little more time before being hauled into a longer-term correction or recession. I lean towards the later dates (2, 3, and 4 above) for this reason. Interestingly, many of my historic charts from months ago and last year suggested Jan/Feb 2025 (also option 2 above) as a very high-risk period. You can view these charts under the above specific chart on TradingView. This chart is your one-stop shop for checking recession trigger levels based on historic timeframes for both yield spreads. You can update this chart data anytime on my TradingView page with just one click. Be sure to follow me there to access a range of charts that will help you assess the direction of the economy and the market. Thanks again for coming along! Remember, you can check in on this chart and press play to get updated data at any time by clicking the link in the comments below or by following me on TradingView. Thanks PUKA
FRED:T10Y3M
by PukaCharts
5
Rapid Yield Curve Inversions as Recession Fears RealizedLast week was pandemonium for US Equities, Japanese Equities, Foreign Exchange markets, Cryptocurrency markets, and Bond markets. Yet, for those positioned for the normalization of the yield curve, results are apparent as the curve has officially normalized into positive territory with a sharp recovery on Friday which continued into Monday. The non-farm payroll report highlighted concerns we previously illustrated that a recession is not off the cards yet. In fact, the latest data suggests it may be likely. The Sahm rule, a strong indicator of past recessions, was activated based on the latest jobs data. Given the possibility of a recession in the US, the further steepening of the yield curve remains a compelling opportunity with uncertainty persisting across all areas of the market. This paper provides a hypothetical trade setup in the 10Y-2Y spread to gain exposure to normalization. LATEST JOB REPORT WAS DISMAL WITH LOW JOBS ADDED, RISING UNEMPLOYMENT The Nonfarm payroll report from July showed a meagre 114k jobs added compared to expectations of 176k. Even worse, figures for May and June were revised lower by a cumulative 29k bringing the updated figures well below the initial analyst consensus for these months. Job addition in July was one of the lowest since the pandemic. Moreover, both initial and continuing jobless claims last week rose to their highest level since 2021. Combined effect on the job market was an increase in the unemployment rate to 4.3%, the highest since 2021. The job market is visibly weakening. Though the effect of Hurricane Beryl likely played a role in the dismal jobs report, the details suggest systemic weakening as both hiring and quits fell to their lowest level since 2020. To make matter worse, conditions may worsen even further in the coming months as Intel announced plans to reduce its workforce by 15k at its most recent earnings. JOBS REPORT TRIGGERS SAHM RULE The Sahm rule is a recession indicator used to identify early signals of a recession. It measures the difference between the current unemployment rate relative to the lowest three-month average in the last 12 months. According to the Sahm Rule, a recession could be on the hoirzon when this value rises above 0.5, Currently, the indicator is at 0.53. It is a highly accurate indicator, proven to be reliable through the last 12 recessions when the indicator was at present values. While no indicator is completely accurate and past results do not guarantee future performance, the accuracy of the indicator should not be ignored. RATE CUT EXPECTATIONS SURGE As a result of the dismal jobs report, rate cut expectations have surged, largely due to expectations that the Fed will be forced to cut rates rapidly in response to a faltering economy. For reference, at the September policy meeting, FedWatch signals a >90% probability of 50 basis point cuts. Just 1 week ago, FedWatch suggested a 10% probability for that decision. Source: CME FedWatch Markets are also expecting a 50-basis point cut at the November meeting followed by a 25-basis point cut at the December meeting for a cumulative cut of 125 basis points in 2024. Source: CME FedWatch BOND MARKETS IN TURMOIL BUT YIELD SPREAD SURGED Due to the rapid reversal in sentiment, US treasury yields have fallen sharply. 2Y yield is 15% lower over the past week. 10Y yield has declined by 10% and 30Y yield has fallen by 8%. On Friday, the decline in 2Y yield was the sharpest since 13/December when the Fed policy projections suggested up to six rate cuts in 2024. This time around, the decline in bond yield has been driven by market fears of a recession which may force the Fed to cut rates rapidly. While the yields have declined sharply, yield spreads have surged. The 10Y-2Y spread has increased by 27 basis points over the past week with a 10-basis point jump on Friday followed by another 8 basis points increase on Monday. The 30Y-2Y spread has been the strongest performer. It has increased by 63 basis points over the past week. It surged by 29 basis points on last Friday and another 14 basis points on Monday. Both spreads have now normalized as 2Y yield has declined much more sharply than 10Y and 30Y yield. The normalization has brought to end the longest yield curve inversion in history that lasted more than two years. This is not unexpected as highlighted by Mint Finance in a previous paper . The yield spread tends to normalize long before a recession actually arrives. However, the spread may rise further. According to historical levels of the 10Y-2Y spreads at the start of previous recessions, there is between 15 and 100 basis points of further upside. The potential for upside is even higher on the 30Y-2Y spread although in 1989, the level was lower than the current level suggesting the risk of a decline. LONG 10Y SHORT 2Y ON FURTHER NORMALIZATION While the movements in the yield spreads over the past week have been enormous, there is a potential for further increase. Recession signals are flashing red. Equity markets are in turmoil. Fed may be forced to reduce rates to support a weak job market. Rapid rate cuts and a recession support further steepening of the yield curve. Historical performance of yield spreads prior to recessions suggests the yield curve may continue to steepen at a rapid rate. We had previously suggested the 30Y-2Y spread as a superior instrument to express views on this normalization. However, the 30Y-2Y spread has surged by 63 basis points in the past week. While it may continue to rise even further, there is a risk that markets have exhausted much of the upside. A position on the 10Y-2Y spread offers potentially higher upside. The 10Y-2Y spread is just above the level of 0 indicating the potential for further recovery. The current 10Y-2Y spread level is far below the levels at the start of previous recessions. Investors can seize opportunities from normalization in the 10Y-2Y spread using CME Yield futures. The CME Yield futures are quoted directly in yield with a one basis point change in the yield representing a P&L of USD 10. The below hypothetical trade setup consisting of long 10Y yield futures and short 2Y yield futures expresses a view on the further steepening of the yield spread with a reward to risk ratio of 1.3x. Entry: 3.7 Target: 27.8 Stop Loss: -15 Profit at Target: USD 241 ( (27.8 – 3.7) x 10 = 24.1 x 10) Loss at Stop: USD 187 ( (-15 – 3.7) x 10 = -18.7 x 10) Reward to Risk: 1.3x 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 www.tradingview.com 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
Yield Curve Inverts Further on Rising Recession Risk As the tides of economic fortune ebb and flow, a spectre of recession looms over the horizon, whispering in the rustling of Treasury yields and the shifting sands of macroeconomic indicators. Recent economic data has painted a complex tableau of financial uncertainty. From declining PMI figures to a palpable deceleration in GDP growth, the economic forecast has shifted, stirring speculations that Fed may be forced to cut rates should the US economy slip into recession. Uncertainty around the timeline of rate cuts plus a potential looming recession are causing the yield curve to invert once more. Investors can obtain exposure using CME yield futures with a reward to risk ratio of 1.6x. RECESSION SIGNALS ARE FLASHING AGAIN Monetary policy winds are starting to shift once more. Recent economic data, including PMI figures, and a sharply weaker GDP in the US have led participants to increase their expectations that the US Federal Reserve (“Fed”) will have to relent and cut rates in 2024. Source: CME FedWatch Over the past month, probability of a rate cut at 7/Nov policy meeting has increased from 42% to 47%. More notably, the probability of a second rate cut at the 18/December policy remains slightly elevated over the past week at 35%. Typically, rate cuts suggest that the Fed is nearing its dual goals of maximum employment and stable prices. However, current expectations for rate cuts may stem from distinct reasons. Inflation remains persistent. Fed officials remain steadfast in their battle against inflation. But inflation is stalled at 3%. Higher rates are instead starting to impact economic growth. As rates remain high, the odds of an economic slowdown rise. On 4/June, job openings in the US fell to their lowest level in three years. On 31/May, the Chicago PMI indicator fell sharply into what is a recession territory. Q1 GDP was revised lower last month. Weak consumption data from the US has led to expectations that GDP growth during Q2 may remain slow. On a similar note, the household jobs survey showed full-time employment declining by 625k in May while part-time employment rose by just 286k. However, not all jobs’ data was negative. The establishment jobs survey showed strong job creation at 272k far higher than expectations of 182k. Additionally, wage growth was above expectations as weekly average earnings rose 0.4% compared to 0.2% in April. The household survey counts each individual only once, regardless of how many jobs they have. In contrast, the establishment survey counts employees multiple times if they appear on more than one payroll. Many observers have been calling for a recession in the US ever since the Fed raised rates to their highest level in 23 years. Yet the US economy has remained robust. Part of the reason behind the resilience has been the savings cushion that US consumers built up during the pandemic. However, with the strong inflation during the past year, most of that cushion has been spent. Consumers have already started to shift their consumption habits and credit usage (and delinquency) has been on the rise. Credit card delinquencies are at the highest level in more than a decade and personal savings built up during the pandemic have been exhausted. ECONOMIC DATA DRIVES BOND YIELDS LOWER AND RE-INVERTS YIELD CURVE Throughout the past 10 days, economic releases in the US have driven bond yields consistently lower. Recent non-farm payrolls data drove a rally in yields. Economic releases have also driven a decline in the yield spreads resulting in further inversion of the yield curve. Since the release of the PCE price index and Chicago PMI on Friday 30/May, the 10Y-2Y spread has declined by nine basis points. The 30Y-2Y spread has performed the worst since then as it stands ten basis points lower. Further, unlike the uptick in yields following NFP, the yield spreads continued to invert further, especially for the 30Y-2Y and 10Y-2Y spread. HYPOTHETICAL TRADE SETUP Historically, the yield spread between 10-year and 2-year Treasuries tends to normalize by the time a recession officially hits the US. Based on current trends, a recession, as indicated by GDP metrics, might not occur until early next year. Currently, the yield curve is deeply inverted, and recession signals are intensifying. Moreover, the possibility of a rate cut remains uncertain. This ongoing uncertainty about the policy direction is further exacerbating the inversion of the 10Y-2Y spread. Another factor to consider is the upcoming US elections. As the Fed strives to remain an independent authority, they may opt to avoid major policy moves before elections are concluded. This week is set to bring several key economic updates, including the May CPI report and the Federal Reserve's revised economic projections. These projections are expected to reveal that rate cuts, previously anticipated for 2024, might be delayed further. The volatility in economic data has made it challenging to assess the yield trends. Despite a general rise in yields, the yield curve continues to invert, particularly the 30Y-2Y spread, which has been the most adversely affected. This reflects ongoing investor concerns about long-term Treasuries as expectations for rate cuts are pushed further into the future. Source: CME CurveWatch Investors can obtain exposure to a further inversion in the 30Y-2Y spread using CME Yield futures. CME Yield futures are quoted directly in yield with a one basis point change in the yield representing a P&L of USD 10. As yield futures across various maturities represent the same notional, spread P&L calculations are equally intuitive with a one basis point change in the spread between two separate maturities also equal to USD 10. The hypothetical trade setup using the 30Y-2Y spread is described below. • Entry: -36.5 basis points (bps) • Target: -50 bps • Stop Loss: -28 bps • Profit at Target: USD 135 (13.5 bps x USD 10) • Loss at Stop: USD 85 (8.5 bps x USD 10) • Reward to Risk: 1.59x 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 www.tradingview.com 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:30Y1!Short
by mintdotfinance
Interest Rates are Moving Again - Breaking Above Recent High2 year, 5 year, 10 year and 30 year yield are all showing a similar characteristic: · Low established in 2020 · Major support trend started forming since then · Seem to have completed its retracement with a double-bottom · Resuming on its major support trend · Target to break above its recent all-time high set on Oct 22 Chart illustrated a 10 year yield futures market. Interest rates and yield moves in tandem, why? Borrowers (for eg. home owners with loan) take reference from interest rates and lenders (or investors) take reference on the yield. Interest rates and yield moves in tandem. Meaning if yields are indicating an upward momentum driven by mainly the investors, interest rates will soon to follow or vice-versa. Though interest rates are making a U-turn from its recent low and breaking above its all-time high. Are you seeing opportunity or feeling stress with more volatility ahead? My strategy: • Have lesser long-term hold on stocks • Trading into the indices - Sell into strength and trading into the volatility • Investing into commodities related asset • Buying into dip(s) on yield futures CME Micro Years Yield Futures Minimum fluctuation 0.001 Index points (1/10th basis point per annum) = $1.00 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. CME Real-time Market Data help identify trading set-ups in real-time and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
CBOT_MINI:10Y1!Long
by konhow
Interest rates are moving againWhat is moving this week? Our weekly eyeball into the different markets. Interest rates likely to be breaking its all time high again, get ready for another volatile month ahead. Difference between yield and interest rate: Borrowers take reference from interest rates and lenders take reference on the yield. Interest rates and yield moves in tandem. Minimum price fluctuation: 0.001 Index points (1/10th basis point per annum) = $1.00 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. CME Real-time Market Data help identify trading set-ups in real-time and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
CBOT_MINI:10Y1!Long
by konhow
The yield curve has to un-invert eventually… right? (Part 2)This week, we thought it will be interesting to review the trade from last week given the reaction post-FOMC, as well as discuss an alternative way to set up this trade. Firstly, let’s review the post-FOMC/employment data reaction. - Nonfarm Payrolls surprised to the upside, as over half a million jobs were added way above the estimates of a sub 200K number. - Unemployment rate continues to fall further, reaching a 53-year low of 3.4% A clear re-pricing has occurred since last Friday’s better-than-expected jobs data and Wednesday’s Federal Reserve meeting. With markets now expecting 1 more rate hike in May, bringing the peak rate up from the 475 -500 bps range to the 500-525 bps range. Keeping this in mind, we go back to our analysis last week to understand this situation and historical precedence. While the time for a pause in rate hike seems to be pushed back, in the grand scheme of things, we think that this has only kept the window of opportunity for this trade open for longer and at a more attractive entry point now. Without repeating ourselves too much, we encourage readers to take a look at our idea last week which explores the historical correlation between the peaking of yield curve inversion and the pause in Fed rate hikes. Link to our last week’s idea: This week, let’s tap into a different instrument. Here, we aim to take a short position on the 2Y-10Y yield differential by creating a portfolio of Treasury futures to express this view. To do so, we would have to first select the 2 instruments, the 2-Yr Treasury futures is a straightforward choice for the short end. But for the 10-Yr leg, we have a choice of the '10-Yr Treasury Note Futures' vs the 'Ultra 10-Yr Treasury Note Futures'. Digging into the contract specification, the 'Ultra 10-Yr Treasury Note Futures' provide a better proxy for the true 10-year duration exposure as the delivery requirements are for Treasuries with maturities between 9year 5 months and 10 years. In comparison, the underlying of '10-Yr Treasury Note Futures' has a maturity between 6 year 6 months and 10 years. With contract selection out of the way, the next step is to calculate the Dollar Neutral spread. This requires us to identify the DV01 of the front and back legs of the spread and try to match them. This is to ensure that the entire position remains as close to dollar neutral as possible, so we can get a 'purer' exposure to the yield difference between the front and back legs, and parallel moves are negated. CME publishes articles on this topic to explain the setting up of a DV01 spread clearer than we can explain. You can find them attached in the reference section below. You can handily find the DV01 of the Cheapest To Deliver (CTD) securities on CME’s website. In this case, we are looking at the 2Yr and Ultra 10Yr Treasury Futures to set up the trade. With the DV01 of the 2Yr at 34.04 and the DV01 of the Ultra 10Yr at 96.26. The spread ratio can be calculated as 96.26/34.04 = 2.83. Rounding this to the nearest whole number, we would need 3 lots of2-Yr Treasury Future and 1 lot of Ultra 10-Yr Treasury Future, to keep the DV01 equal (neutral) for both legs of this portfolio. Given our view of the 2Yr-10Yr yield spread turning lower, we want to short the yield spread. Yield and prices move inversely, hence, to short the yield spread, we long the Treasury Futures spread as it is quoted in price. We can long 3 ZTH3 Futures (2Y Treasury Future) and short 1 TNH3 futures (Ultra 10Y Treasury Future) to complete 1 set of the spread. However, since the 2-Yr Treasury Futures has a notional value of 200,000 while the Ultra 10Y Treasury Futures a notional of $100,000, the price ratio will be 6:1 when the position/leg ratio in the spread trade is 3:1. As such the current level would provide us with an entry point of roughly 494 with a minimal move in Ultra 10yrs representing 15.625 USD and that in 2Y representing 7.8125 USD. While slightly more complex in setting up, this trade allows us another alternative to express the same view on the yield curve spread differential. Being able to execute the trade via different instruments allows you to pick the most liquid markets to trade or take advantage of mispricing in the markets. The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com Disclaimer: The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description. Reference www.cmegroup.com www.cmegroup.com www.cmegroup.com www.cmegroup.com
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CBOT:ZT1!Long
by inspirante
9
The yield curve has to un-invert eventually… right?Those who have been reading our past 2 ideas will know we’ve been harping on and on about expected rate path and policy timelines. Why the recent obsession you ask? Because we think we’re on the cusp of major turning points. So, for the third time, let’s look at the market’s expected policy rate path. With FOMC coming up this week, we are expecting a 25bps hike followed by some commentary/guidance on the next cause of action. Based on CME’s Fedwatch tool, markets are expecting a last hike of 25bps in the March FOMC before a pause in the hiking cycle. Now keep that in mind. One interesting relationship we can try to observe is how the 2Yr-10Yr yield spread behaves in relation to where the Fed’s rate is. We note a few things here. Firstly, the ‘peak’ point of the 2Yr-10Yr spread seems to happen right around the point when rate hikes are paused. With the Fed likely to pause as soon as March, we seem to be on the same path, setting up for a potential decline in the spread. Secondly, the average of the past 3 inversions lasted for around 455 days, and if you count just the start of the inversion to the peak, we’re looking at an average of 215 Days. Based on historical averages, we are past the middle mark and have also likely peaked, with current inversion roughly 260 days deep. Looking at the shorter end of the yield curve, we can apply the same analysis on the 3M-10Yr yield spread. The ‘peak’ point of the 3M-10Yr yield spread is marked closer to the point when the Fed cuts, except in 2006, while the average number of days in inversion was 219 days and the average number of days to ‘peak’ inversion was 138 days. With the current inversion at 105 days for the 3M-10Yr Yield spread, we are likely halfway, but the peak is likely not yet in. (Although eerily close to when the Fed is likely to announce its last hike, March FOMC, 51 days away). Comparing the 2 yield curve spreads, we think a stronger case can be made for the 2Yr-10Yr spread having peaked and likely to un-invert soon. Handily, CME has the Micro Treasury Yield Futures, quoted in yield terms, which allows us to express this view in a straightforward manner allaying the complications with DV01 calculation. We create the short yield spread position by taking a short position in the Micro 2-Yr Yield Futures and a long position in the Micro 10-Yr Yield Futures, at an entry-level of 0.623, with 1 basis point move equal to 10 USD. The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com Disclaimer: The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description. Reference: www.cmegroup.com www.cmegroup.com
Editors' picks
CBOT_MINI:2YY1!Short
by inspirante
11
Are U.S. Yield Curve Inversions Signaling 2023 Recession? Looking at the Inverted Yield Curve Chart s of the U.S. 10yr Treasury vs. U.S. 3mo Treasury (US10Y - US03M), along with the U.S. 10yr Treasury vs. U.S. 2yr Treasury (US10Y - US02Y) — are yields signaling a topping process? Or, should we even higher yields into 23'? 4-Hour Inverted Yield Curve Chart 📊 Top Chart: US10Y - US03M Bottom Chart: US10Y - US02Y Daily Inverted Yield Curve Chart 📊 Top Chart: US10Y - US03M Bottom Chart: US10Y - US02Y Weekly Inverted Yield Curve Chart 📊 Top Chart: US10Y - US03M Bottom Chart: US10Y - US02Y Monthly Inverted Yield Curve Chart 📊 Top Chart: US10Y - US03M Bottom Chart: US10Y - US02Y Monthly Inverted Yield Curve Chart 📊 Bottom Chart: US10Y - US02Y U.S. 2yr Treasury (Inverted) vs. SPY (SPX ES1!) 📊 Black Line: SPY Blue Line: US02Y Inverted U.S. 2yr Treasury (Inverted) vs. QQQ (NQ Nasdaq) 📊 Black Line: QQQ Blue Line: US02Y Inverted U.S. 2yr Treasury (Inverted) vs. DIA (Dow Jones Dow Jones Industrial Average DJIA) 📊 Black Line: DIA Blue Line: US02Y Inverted U.S. 2yr Treasury (Inverted) vs. IWM (Russell 2000 Russell Small Caps RUT) 📊 Black Line: IWM Blue Line: US02Y Inverted Do you think that yields have reached their peak for this Federal Reserve tightening cycle here in late 22'? Or, will we see further rises in yields, putting more pressure on risk assets in the new year (23')? 👇🏼 Yield Curve Inversion Chart Template 📊👇🏼 www.tradingview.com Inverted U.S. 2yr Treasury Curve vs. Asset (SPY QQQ DIA IWM) Chart Template 📊👇🏼 www.tradingview.com
TVC:US10Y
by kylemusserco
UPDATE: USDJPY Long PositionFundamentals : See previous updates.... Technicals : The price moved from bottom to top of the band in what appears to also be a break out and a retracement to support. On top of this, we can see that a chart of US bond yields, which predict the direction of the USD, remain supportive of the USD going forward. Therefore, buying dips on USDJPY. For several other reasons, I prefer UJ first to tackle the benefits of a strong USD in the coming weeks until March 2022. My stop on USDJPY us 113. Targets@ 116.33 and 117.85 or 121. Positive MACD Stronger RSI Pullback to support after a double bottom Fibs Horizontal support Pitchfork support Daily View: 8 hour view: 8 Hour view scrunched out: 1 Hour Chart view:
Long
by Rocketman
High consumer price inflation is good for borrowers, right? Err…Another Market Myth Exposed The Nasdaq index has now declined by 10% from its November high , prompting the mainstream financial media to call it a “ correction ” whatever that means. I think they call it a bear market when it is down by 20% . Many stocks have already fallen by at least that amount, and realistically, it’s all semantics anyway. It’s early days, but what is curious, though, is that high yield , or junk , bonds continue to hold up. To be fair, junk bonds, as measured by the U.S.$ CCC & Lower-rated yield spread reached peak outperformance in June last year and have underperformed since, but yet there have been no signs, as yet, of any rush out of the sector. I heard an analyst on Bloomberg TV yesterday say that he was bullish of credit, particularly junk, because it does well in an accelerating consumer price inflation environment. The theory is that higher consumer price inflation means that companies can increase prices, thereby increasing revenue in nominal terms. At the same time, though, the amount the company owes via its bonds remains the same, thereby decreasing the debt’s real value and making it easier to service. It’s a win-win situation apparently, and that means junk bonds outperform. The opposite should be true under consumer price deflation. Junk bonds should underperform because, with nominal corporate revenues declining, the value of debt goes up in real terms, making it harder for corporates to service it. OK, I thought, channeling Mike Bloomberg’s mantra of, “ in God we trust, everyone else bring data ” let’s have a look at the evidence. The chart above shows the U.S. dollar-denominated CCC & Lower-rated yield spread versus the annualized rate of consumer price inflation in the U.S . Apart from the period of 2004 to 2006, there’s hardly any evidence to suggest that accelerating consumer price inflation is good for the high-yield corporate debt market. Junk bonds were only just being invented by Michael Milken in the 1970s, and didn’t come into popularity until the 1980s, but we can examine corporate bond performance by looking at the Moody’s Seasoned Aaa Corporate yield spread to U.S. Treasuries. Doing so, reveals that, in the first major consumer price inflation spike, between 1973 and 1975, corporate debt underperformed as the yield spread widened. In the second major consumer price inflation spike, from 1978 to 1980, corporate debt briefly outperformed but then underperformed dramatically, as annualized price inflation reached 13%. It goes without saying, of course, that this analysis is just looking at the relative performance of corporate debt under accelerating consumer price inflation. The nominal performance is another matter. Borrowers and lenders ( bond investors ) both got savaged in the 1970s with the Moody’s Seasoned Aaa Corporate yield rising from 3% to close to 12%. The conclusion we must reach is that the level of consumer price inflation does not matter to relative corporate bond performance. It does, however, matter for nominal performance . More semantics, some may say. What really matters is how it affects one’s wallet.
FRED:BAMLH0A3HYCEducation
by ferGOD