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 April, 2010
Closing flattener #3
Tuesday, April 27th, 2010Interest rates in Japan
Sunday, April 18th, 2010Interest rates in Japan are remarkably low: 30-year JGBs currently yield 2.22% and 10-year JGBs yield 1.33%. In contrast, 10-year Treasuries yield 3.75% and 30-year Treasuries yield 4.66%, so 10-year Treasuries have 242 bps of yield advantage and 30-year Treasuries have 333 bps of yield advantage vs. JGBs.
Why are interest rates in Japan so low? The proximate cause is that Japan seems to be locked into post-bubble deflation. And why is that? Couldn’t Japanese monetary authorities simply do a helicopter drop of cash into the economy to defeat deflation?
In an April 15, 2010 Financial Times article, David Pilling writes:
Economically, and in spite of this week’s formation of a ruling-party faction that favours inflation-targeting, the country’s leaders nourish a fatalistic acceptance of deflation. True, 15 years of more or less continuously falling prices have not triggered the crisis some predicted. But falling nominal output has accelerated Japan’s relative economic decline.
…
Yet many Japanese seem more at ease with the idea of stately decline and genteel isolation. One of Japan’s most popular books in years, The Dignity of a Nation, even suggested Japan should stop teaching its children English and withdraw from the world trade system altogether. Short of such radicalism, many people ask what is wrong with being a backwater of wealth and civility in an out-of-kilter world.
…
For Japanese with jobs and access to savings, even deflation can be a boon. “We are just quietly enjoying our affluence,” says one satisfied customer.
David paints a picture of a sleepy, backwater Japan where people “with jobs and access to savings” are not particularly bothered by deflation.
USD/JPY is currently 92.06. YCS closed at 20.77 on Friday, April 16.
Closing 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.