Monday, December 8, 2014

Treasury 5-30 Yield Spread; Extraordinary, But Enough For Now?

We have closely followed the Treasury 5’s-30’s yield curve spread well before August 2013 with anticipation that Fed policy ‘normalization’ the next time around would require greater effort on the part of policy rates.  The baggage of a large Fed portfolio and resultant excess liquidity would require a stronger policy rate footprint I have long suggested, even with the new tools the Fed is now practicing. 


My minimum objective of 120 basis points wide by March 2015 was aggressive when expressed in early-March of this year following a conflicting view tweeted by Bill Gross (‘Disregard;PIMCO's Gross tweets: "Sell what the Fed has been buying...‘).  At that time in early-March of this year, the forward market priced a 120 bp wide 5-30 yield spread only as soon as September 2015.  


This spread trades at 126 bps now and in all likelihood will eclipse my once aggressive call well before March of next year.  For now however, it has been a very aggressive 17 basis point flattening since the start of the month.  While we might look for even more flattening in the coming weeks and even later this week, we should probably expect some flattening position unwinds today.  


For guide, any legging of this position unwind or conversely, tactical positioning for a steepening would likely benefit from initiating the sell side of the equation first if any legging is to be done.  



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