How to position for yield curve un-inversions!It has been some time since we delved into the intricate world of interest rates and their prospective trajectories. With the yield curve experiencing significant movement in recent weeks, it's high time we reassess our stance. Following a staggering 500 basis points increase, we now find ourselves potentially nearer to the end of the rate hike cycle than ever before. The recent hawkish pause announced in the last meeting has left market participants on tenterhooks, pondering the future course of action in the ongoing battle against inflation.
Given the downward trend in inflation and the possibility of at least one more rate hike, 'real' yields have ascended beyond the 0% level, as depicted in the chart above. Since the 2010s, real yields have consistently struggled to surpass the 1.2% level. However, the recent lower inflation prints place the 'real' yield at a new decade high of 1.25%. So, how does the yield curve inversion behave during periods of real yields? Interestingly, in three of the past four instances, the curve 'un-inverted' once real yields exceeded 0.
Of greater significance is the yield curve's response after the Fed cuts rates. Since 1989, this has been a key signal of the yield curve un-inversion. Given this event's proximity and the current 2Y-10Y yield curve, we contemplate the optimal strategy to capitalize on this likely un-inversion.
One approach is to examine all possible inversion combinations between the 2, 5, 10, and 30-year yields. All these combinations present an inverted curve, except for the 10Y-30Y segment.
Upon dissecting the analysis to focus solely on 2-year inversions, we observe the following:
The 2-year inversion is generally the steepest, with the 2Y-10Y ranking as the most inverted segment of the yield curve. All inversions anchored with the 2Y are at their all-time highs, plunging us into uncharted waters.
In contrast, the 5-year and 10-year yields exhibit more subdued movements. Their inversions have yet to reach all-time highs, and the overall range of movement is relatively restrained.
Therefore, to maximize returns on the un-inversion move, one could position to short either the most inverted section of the curve, the 2Y-10Y, or the 2Y-30Y, which typically experiences the largest movement upon un-inversion.
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. By creating a short yield spread position, we are not merely speculating on the direction of individual yields but rather on the relative movement between them. Trading the yield spread instead of just an outright position in a single part of the curve also protects us from parallel shifts in the yield curve, especially in volatile times like these. This strategy takes advantage of the yield curve dynamics, particularly the inversion trend we've been observing. 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 or Micro 30-Yr Yield Futures to express the curve un-inversion view, with 1 basis point move equal to 10 USD.
The charts above were generated using CMEโs 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
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US02Y trade ideas
US 2 YEAR TREASURY BILLS ANALYSISThe yields on the short term 2 Year Treasury Bills have been on the rise since the FOMC started hiking the Dollar interest rates in March 2022. Earlier this week, the FOMC maintained the interest rates at 5.25% for the first time. This marks the beginning of the end of the current economic cycle. The yields are now at previous resistance from the 2007/2008 highs. If the FOMC Pivots at 5.25%, the short term Treasury yields will fall.
Bond Yields are mixed, longer term look better atm๐จ๐จ๐จ#yields๐จ๐จ๐จ
3M + 6M have been weak lately, we called them topping some time ago.
Will they turn soon?
1Y trading at recent highs and seems like it is trying to go higher.
2Yr looks like it wants to the recent test highs.
10Yr TVC:TNX peaked LONG ago!
Breaks white line, downtrend, likely trades higher.
Inverted yield curve thing of past?
#bonds #tech NASDAQ:NDX TVC:DXY
InversionAn inverted yield curve shows that long-term interest rates are less than short-term interest rates. With an inverted yield curve, the yield decreases the farther away the maturity date is. Sometimes referred to as a negative yield curve, the inverted curve has proven in the past to be a reliable indicator of a recession.
FOMC nothing to see hereFOMC has raised interest rates for 9 times in a row. The next Fed interest rate decision will be publicly announced on Wednesday 5/3/23 at 2pm. The market consensus is expecting FOMC to raise interest rates for the 10th time in a row.
FOMC rate hikes:
3/16/22 +0.25% = 0.50%
5/4/22 +0.50% = 1.00%
6/15/22 +0.75% = 1.75%
7/27/22 +0.75% = 2.50%
9/21/22 +0.75% = 3.25%
11/2/22 +0.75% = 4.00%
12/14/22 +0.50% = 4.50%
2/1/23 +0.25% = 4.75%
3/22/23 +0.25% = 5.00%
5/3/23 +0.25% = 5.25%
The collapses of First Republic Bank, Silicon Valley Bank and Signature Bank were the second, third and fourth largest bank failures in the history of the United States. The collapse of Washington Mutual during the 2007โ2008 financial crisis was the largest.
On July 6th 2022, the 2s / 10s yield curve inverted, and it has widened its gap since then. An inversion of the 2-year, 10-year part of the curve is viewed by many as a reliable signal that a recession is likely to follow in one to two years.
US 2 YEAR GOVERNMENT BONDSJust like the 3 month bond yield, the 2 Year is also short term and mainly determined by the fed policy. 5.5 Maybe the next stop for the short 2 Year bond yields where the market will pause, consolidate and then breakout/reverse. The fed may also maintain the rates at around 5.5.
2 year yield drifting higher.The 2 year yield saw one of its biggest divergences from the Fed Fund rate during the banking collapse.
Now that the banks have settled the 2 year yield is closing the distance on the Fed Fund rate.
Recapturing the daily 200 MA is bullish for the short term yields.
This move up in yields could be signaling inflation starting to uptick as the economy & labour market remain robust.
2Yr & $TNX coming back hard & worrisome for #techLooking @ a few different #yields
(Not shown)Weekly 6month and 1Yr easier to notice BEAR FLAG & the pattern is close to being annulled.
Daily 2Yr looking good, breaking out of channel.
Hard to short dull market but seeing #bond yields climbing is worrisome for short term.
TVC:TNX 10Yr looks like 2Yr.
2 yr yield risingBanks reported profits, bank fears are gone, yields rising, lol.
Aside from my index futures indicators (which predicted a red day anyways), rising yields are causing the market to drop. The whole pump this week was about "disinflation", but yields were down on bank fears so now the reverse play, lol.
Gold and cryptos down along with everything besides financials, lol. Makes sense if you think about it, but not something I would have predicted.
These bond yield adjustments usually take a couple of days, so bearish for Monday