If you want to watch spreads in the Treasuries I would watch the cash spreads. The 10-30yr cash spread closed today at about +7 basis points, compared to the 2-30yr cash spread which inverted for the first time in about 5 years this morning. The yield curve spreads at this moment in time (especially around the 3-7 year sector) are dominated by movement of central foreign bank funds. The short end is tied to the Fed, while the long end is most worried about inflation. Taking those three things into account you can develop your own view on the yield curve spreads. I would also try to understand where the duration guys are targeting on the curve and create spreads based on the timing of their rotation throughout the curve.
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Bond rally nearing an end?
- Thread starter gharghur2
- Start date
Quote from mcurto:
If you want to watch spreads in the Treasuries I would watch the cash spreads. The 10-30yr cash spread closed today at about +7 basis points, compared to the 2-30yr cash spread which inverted for the first time in about 5 years this morning. The yield curve spreads at this moment in time (especially around the 3-7 year sector) are dominated by movement of central foreign bank funds. The short end is tied to the Fed, while the long end is most worried about inflation. Taking those three things into account you can develop your own view on the yield curve spreads. I would also try to understand where the duration guys are targeting on the curve and create spreads based on the timing of their rotation throughout the curve.
I have an EOD 2yr/10yr inversion on Jan 31st. The 2yr/30yr closed today at a near inversion of 0.2 basis points. Guess the 10yr/30yr is next?
Noticed the 2000 inversion lasted for almost a year...
They are expecting the 30 Yr auction Thursday to be a huge success among pension funds because the maturity matches their needs better. Another thing that might have contributed to the 30 Yr popularity since Friday is that the amounts to sell announced last week ended up being a little bit less than expected for the 30 Yr but a little more than expected (by the same amount) for the three-year notes auctioned today.
I still think that we have one more leg on the downside but the timing has changed.
I still think that we have one more leg on the downside but the timing has changed.
The mortgage guys continue to buy calls as we dip. As of late though Countrywide is pretty much set in their position. They are long about 50,000 May 110 calls and both April 109 and 110 calls at least 20,000 a piece. They setup this position in mid-to-late January and haven't done much size since. On the other hand, Wells Fargo waited on their convexity hedging and bought calls as we began to breakdown from above the 109 handle. He is currently long about 30-40,000 June 110 calls and another 30-40,000 of the May 110 calls. Countrywide has yet to roll any of his position into the June (would imagine will do 109's and maybe even some 108's) and neither of them are active on the put side at all. As for implied vol, we have had an uptick as of late but still at historically low levels, would imagine if we can break to 106 in the next few weeks it may catch a solid bid. The biggest players in 30yr options continue to buy the April 111-115 strangle versus selling the June 109-117 strangle (about an 8,000 lot position that he scalps over a month or so period every expiration cycle for the last few months). He sold this initially with the June at 3 ticks over and is taking a little beating with the June now 10 ticks over, so back month vol was a little more bid than he anticipated. Yes, I think the inverted curve is correlated with higher implied vols because this was very unexpected (especially in 10's/30's) by some of the bigger hedge funds who put on steepning bets on the 10-30yr swaps and cash spreads.
"The big story, however, was the refunding and the demand for the 30yr Bond, which drove rates back down to the 4.5% level. This creates a total yield inversion between the 2yr, 10yr and 30yr: 4.69% - 4.58% - 4.54%. This has not occurred in five years, the last time we had a recession. Posting a 30yr chart of the history of this type of event. I'm not a bond expert by no means, but many are stating that the rules have changed and the yield inversion is going to be a normal phenomenon into the foreseeable future. I seem to recall the same statement about the dotcom's in the late 1990's before nearly everything went bust. We'll keep an eye on this yield inversion."
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I liquidated my short positions held since early January. I don't think we reached the bottom yet but I'm getting conflicting signals and interpretations that make me uncomfortable.