Wednesday, January 29, 2014

Good Time for 'Cyclical Yield Analysis' Review



This is a great time to review the Cyclical Yield Analysis I first presented in 2011.  Based on ten year Treasury yields dating to 1998, there has never been a breach, until end of Q1 next, of a post-August yield low made, when that yield low was followed by a 39 basis point or greater increase in ten year yield.  On October 23, the ten year Treasury yield low was 2.502 and on December 18th, the ten year Treasury traded to 2.894%.  I expect, based on the trend over the last 16 years that ten year Treasuries will not settle below 2.502 prior to end of March 2104.     
 

                                                               
Currently ten year Treasuries yield 2.72%.  If the yield fall further today for some Fed action, some lack of Fed action or some equity market or emerging market performance, we should stand ready to take advantage of any Treasury move toward the 2.50% level.     
                                                    
I have calculated values for some of the calls and puts for the 23 day TYH4 options on a move toward the 2.50% yield level.  All else equal, clients should consider selling calls or buying puts on that approach.   
                           
At the time of this writing (Jan 29, 10:00am Chicago) TYH4 (10yr Treasury Note Futures) trade at 125-11. 

2.60% yield in ten year Treasuries suggests a TYH4 futures price of 126-22 while a yield of 2.50% suggests a TYH4 price of 127-15+.

Below is a table of where TYH4 puts and calls are now and should trade at lower yields today:

10yr Yield

2.72%

2.60%

2.50%

Futures Price

125-11

126-22

127-15+



Calls
Puts
Calls
Puts
Calls
Puts
125.5

37
47
1-26
14
2-05
6
126

23
1-02
1-02
23
1-41
10
126.5

14
1-24
47
36
1-16
18
127

9
1-50
32
52
58
27
127.5

5
2-14
22
1-10
42
43
128

3
2-45
14
1-34
30
63
128.5

2
3-11
10
1-59
21
1-18
129

1
3-43
6
2-26
14
1-47


     
                                                                            
Consider taking advantage of a move, if it happens, toward 2.5%, on expectation that the yield low from Oct at 2.502 holds.            

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