I am closing flattener recommendation #3 with a profit. Current yields:
2-year yield: 97 bps
10-year yield: 369 bps
2s-10s spread: 272 bps
Archive for the ‘Fixed Income’ Category
Closing flattener #3
Tuesday, April 27th, 2010Closing short 2-year notes recommendation
Monday, April 5th, 2010On March 2, 2010, I wrote: “I think 2-year notes yields will go higher (2-year note prices will go lower)…Right now, 2-year notes yield 81 bps. I think we’ll see 2-year note yields rise at least 20 bps within six months. Recommendation: short 2-year notes (or sell 2-year note futures).”
2-year notes now yield 117 bps. This is an increase of 36 bps in a little more than a month. I am closing my short 2-year notes recommendation now. Note that this was a different trade idea than the flattener trade idea – the flattener is a bet on the slope of the yield curve, while this was a bet on the level of interest rates. My third flattener recommendation is still open.
The flattener trade involves shorting 2-year notes and also going long 10-year notes, so a trader who implemented both my flattener recommendation and my short 2-year notes recommendation would have overlaid one short position in 2-year notes on top of another.
Flattener #3
Thursday, March 25th, 2010I am recommending a 2s-10s flattener a third time. Currently:
2-year yield: 109 bps
10-year yield: 386 bps
2s-10s spread: 277 bps
I recommended the first flattener on Feb 9 at 282 bps and closed the recommendation on March 5 at 276 bps. I recommended the second flattener on Mar 8 at 283 bps and closed the recommendation on Mar 12 at 274 bps.
FX Update:
I recommended buying USD/JPY on Mar 3, 2010 when USD/JPY was 88.72. Right now, USD/JPY is 92.80. This trade idea could also be implemented by buying the ETF YCS. YCS was 19.31 on Mar 3; it is now 21.10.
Closing re-opened 2s-10s flattener
Friday, March 12th, 20102-year yield: 96 bps
10-year yield: 370 bps
2s-10s spread: 274 bps
I’m closing the flattener recommendation I initiated on March 8, when the 2s-10s spread was 283 bps. Previously, I recommended a flattener on Feb 9 at 282 bps and closed it on March 5 at 276 bps.
Opposing viewpoint: Barclays says curve steepener still the right trade
Thursday, March 11th, 2010http://www.jlninterestrates.com/2010/03/barclays-says-curve-steepener-still.html
Barclays Capital strategists say in a written report that they have fine-tuned their rates forecast, highlighting the strength in the front end and their continued expectation of a selloff in the long end, led by a stronger economy and supply-demand imbalance. Recent TIC data also highlight that China has resumed diversification away from USD securities, they write.
In the report, they maintain their curve-steepening view. A stronger-than-consensus payroll report seemed to support the view that the U.S. economy continues to turn around, they write.
I think the curve will flatten while Barclays thinks it will steepen. It is possible for both of us to be right. The curve might steepen in the short-term, but then flatten over a longer time horizon.
The curve has flattened since I re-opened my flattener recommendation, but it may well become steeper in the short-term.
2-year yield: 94 bps
10-year yield: 373 bps
2s-10s spread: 267 bps
FX Update:
USD/JPY is now 90.51 (vs. 88.72 when I recommended buying it) and YCS is 20.09 (vs. 19.31 when I recommended buying it).
Re-opening 2s-10s flattener
Monday, March 8th, 20102-year yield: 87 bps
10-year yield: 370 bps
2s-10s spread: 283
Recommendation: put on 2s-10s flattener again.
Closing 2s-10s flattener
Friday, March 5th, 2010Yesterday, I wrote “Today’s initial claims report is worth paying attention to, but tomorrow’s nonfarm payrolls report is more important. I think we will see further confirmation of an improving employment picture, but this is by no means assured.”
Today’s nonfarm payrolls report was better than expected:
U.S. nonfarm payrolls declined for the 25th time in the past 26 months, falling by 36,000 in February to 129.5 million, the Labor Department estimated Friday.
Job losses were concentrated in construction, schools, retail and publishing. Manufacturing jobs rose by 1,000, the second increase in a row.
The unemployment rate was steady at 9.7%.
…
The employment report was better than expected, as economists surveyed by MarketWatch were forecasting a drop of 90,000. They expected the unemployment rate to rise to 9.8%.
Payroll data for December and January were revised higher by 35,000.
The 2-year yield is 91 bps and the 10-year yield is 367 bps, so the 2s-10s spread has flattened to 276 bps. I am closing my 2s-10s flattener recommendation with a profit. I initiated this recommendation at a spread of 282 bps on Feb 9, 2010. The curve may well continue to flatten, but I do not have a strong conviction about the 2s-10s spread anymore, so I prefer a neutral stance.
My recommendation to buy USD/JPY continues to perform well. USD/JPY is now 90.10. The increase in USD/JPY is a combination of the yen weakening on a report that the Bank of Japan is considering further easing measures and the dollar strengthening on the better than expected nonfarm payrolls report.
Japanese stocks jumped Friday, buoyed by a report that the country’s central bank was considering taking further monetary easing steps to shore up a recovery in the world’s second-biggest economy.
…
In December, the bank eased monetary policy by offering 10 trillion yen ($112 billion) in short-term loans to commercial banks to boost liquidity.
First Hoenig, now Bullard
Friday, March 5th, 2010http://www.reuters.com/article/idUSTRE6234TA20100305
A second senior Federal Reserve official on Thursday joined the ranks of those doubting whether the Fed should continue to commit to hold rates exceptionally low for an extended period, a sign pressures are building to drop the wording.
The curve continues to flatten. The 2-year yield is 86 bps and the 10-year yield is 3.61 bps, so the 2s-10s spread is now 275 bps. The dollar continues to strengthen against the yen: USD/JPY is now 89.24.
U.S. Unemployment Claims Fell to 469,000 Last Week
Thursday, March 4th, 2010http://www.bloomberg.com/apps/news?pid=20601068&sid=alAMN_KVoQ6M
Initial jobless applications fell by 29,000 to 469,000 in the week ended Feb. 27, in line with the median forecast of economists surveyed by Bloomberg News, Labor Department figures showed today in Washington. The number of people receiving unemployment insurance decreased to the lowest level in a year, while those receiving extended benefits climbed.
So far, my trade ideas are performing well. 2-year notes now yield 86 bps and 10-year notes now yield 364 bps, so 2s-10s has flattened to 278 bps (I recommended a 2s-10s flattener at 282 bps). Two days ago, I wrote that I thought that 2-year yields would go higher. 2-year notes were yielding 81 bps two days ago and now they yield 86 bps. I wrote a bullish post on USD/JPY yesterday when the exchange rate was at 88.72; now USD has strengthened vs. JPY to 89.01. Two and three days ago, I highlighted the improving employment picture (“Firms Move Gingerly to Rescind Salary Cuts” and “The unemployment rate is starting to turn”).
Today’s initial claims report is worth paying attention to, but tomorrow’s nonfarm payrolls report is more important. I think we will see further confirmation of an improving employment picture, but this is by no means assured. A weak payrolls number could easily turn my winning trade ideas into losers. However, 2s-10s, 2s, and USD/JPY are at such extreme levels that even if tomorrow proves to be a bad day for my trade ideas, I feel confident that they will pay off eventually.
Greece: extra austerity measures
Wednesday, March 3rd, 2010Greece decides on 4.8 billion euros in extra measures
Greece’s cabinet on Wednesday decided to take extra austerity measures totaling 4.8 billion euros ($6.49 billion) to ensure it meets key fiscal targets this year, a government source said.
“Measures which will yield 4.8 billion euros have been decided,” the government official who took part in the cabinet meeting said. “Half will be from spending cuts and another 50 percent from tax increases.”
The measures include an increase of value-added tax by 2 percentage points to 21 percent and trimming public sector salary bonuses by 30 percent, the source said.
We should see an unwind of flight-to-Treasuries soon.