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Micro 2-Year Yield Futures (Jan 2022)

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2YYF2022 trade ideas

Auction Dynamics Augurs Well for Long 2Y Short 5Y SpreadIn US Treasury Auctions, the Bid to Cover ratio signals the strength of an auction. A higher ratio implies greater demand. As rate cut expectations and economic outlook evolves, so do the spreads across different maturities. This paper provides US economic overview, resultant rate outlook, and divergence in auction demand across different maturities. Contrasting spreads across maturities, the paper posits a hypothetical trade comprising of long 2Y and short 5Y spread. The spread benefits from continued yield curve inversion and from higher demand for 5Y treasuries. Previously we highlighted a rebound in US treasury yields as market expectations of rate cuts were tempered. Rebound in CPI and jobs data pushed expectations further out. Back in December 2023, FedWatch signalled up to six rate cuts of 25 basis points (bps) each. Cuts were anticipated to start in January 2024. Since then, two FOMC meetings have passed with rates unchanged. The CME FedWatch now signals just three cuts (of 25 bps each) starting in June 2024. Source: CME FedWatch Market expectations have shifted drastically even as Fed outlook remains unchanged. Fed’s dot plot from March FOMC meeting below shows that it anticipates three cuts this year. This is unchanged from the December dot plot. Source: FOMC Projection Table Shift in rate cut expectations resulted in treasury yields rebound. Since reaching its lowest in mid-Jan, 2Y yields have shot up by 42 basis points (nearly 10%) during Jan and early-Feb. Since then, 2Y yields have fluctuated but remain largely flat. During this period, economic data has come in hotter than expected. CPI in Jan and Feb was above expectations. Non-Farm Payrolls (NFP) were substantially higher than expectations. Yields have ended up higher following the last two NFP and CPI prints. GDP estimate in Jan was slower but following revisions, the release on 28/March showed GDP is also growing faster than expectations. PCE price index has come in close to expectations. Against that backdrop, the two FOMC meetings thus far have resulted in (1) No hike & No guidance, and (2) No hike & Reaffirm guidance. CONTRASTING AUCTION PERFORMANCE ACROSS MATURITIES Demand for 10-Year Treasury Slowing : Auction for 10Y maturity was exceptional in February 2024. It was slower in March 2024. On 7/Feb, the US 10Y auction fetched a record USD 45 billion with a bid-to-cover ratio of 2.56. The 12/March auction showed slowdown in demand. It fetched USD 39 billion with a lower bid-to-cover ratio of 2.51. Bid-to-Cover ratio is the dollar amount of bids in a Treasury auction relative to the amount sold. The bid-to-cover ratio is an indicator of Treasury demand. High ratio indicates strong demand. Robust Demand for 30-Year Treasury : Auction for the 30Y Treasury drew USD 27 billion during 8/Feb auctions. The March auction was lower at USD 22 billion but the Bid-to-Cover for 30Y treasuries was higher (2.47 in March vs 2.40 in Feb) indicating strong demand. Demand for medium term treasuries (5Y and 2Y) is strongest : Demand for medium-term securities remains strongest. Last week, the 5Y Auction fetched a record USD 67 billion. 2Y notes fetched USD 66 billion (higher than any auction over the past year) while the 5Y notes fetched USD 67 billion. Source: CME TreasuryWatch Demand for medium-dated treasuries relative to the 10Y notes is visible in the bid-to-cover ratio. The ratio for 5Y and 7Y notes has risen since 22/Jan, while those for 10Y ones have softened. Source: CME TreasuryWatch Demand for medium term (1Y to 5Y) treasuries remains strong despite Fed offloading these from its balance sheet. YIELD CURVE RE-INVERSION IS IN PLAY Previously, we noted the trend of re-inversion in the yield curve. The 10Y-2Y inversion reached its deepest on 6/March. The 10Y-2Y spread performed worse than the 7Y-2Y and 5Y-2Y spreads. Since then, the 7Y-2Y and 5Y-2Y spreads have underperformed the 10Y-2Y spread. The underperformance has been particularly pronounced since the FOMC meeting on 20/March. Following that meeting, the 5Y-2Y and 7Y-2Y spreads did not recover as much as the 10Y-2Y spread. This underperformance is likely to continue as demand for medium-dated treasuries (5Y and 7Y) remain sharply stronger than the demand for 10Y treasuries. Higher demand acts to push yields lower, leading to a wider spread with 2Y treasuries. OUTLOOK FOR RATE CUTS REMAINS UNCERTAIN Shaan Raithatha, senior economist at Vanguard, stated that his base case calls for no cuts in 2024.While FedWatch currently signals a rate cut at 12/June meeting, the probability is still far from firm. Recent GDP figures suggest that the economy remains strong. It gives the Fed more room to keep rates elevated. During this period, the yield curve is likely to continue re-inverting. HYPOTHETICAL TRADE SETUP Auction dynamics for medium-dated treasuries signals upside for a spread comprising of long 2Y treasuries and short 5Y ones. Using CME’s Yield futures, investors can position across the yield curve intuitively. Yield futures are quoted directly in yield with a 1 basis point change in the yield representing a P&L of USD 10. As yield futures across various maturities represent the same notional, spread P&L calculations are equally intuitive with a 1 basis point change in the spread between two separate maturities also adding up to a P&L of USD 10. As demand for 5Y treasuries rise, yields on those will fall relative to 2Y notes. Yields on 5Y softening compared to 2Y notes will result in re-inversion of the 5Y-2Y spread. Against that backdrop, the following hypothetical trade set up will deliver a risk-reward ratio of 2.1x: • Entry: 17.30 basis points • Target: 46 basis points • Stop Loss: 31 basis points • Profit at Target: USD 287 • Loss at Stop: USD 137 • Reward to Risk: 2.1x MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
CBOT_MINI:2YY1!
by mintdotfinance
Yield curve is inverted today - Its implication and attributeWe have an inverted yield curve today - When the near end yields or interest rates is higher than the far end, we have an inverted yield. What is its implication and any attributes? To understand the implications of an inverted yield curve, it is crucial to know what a yield curve is and how it works. A healthy yield curve – It shows the relationship between the interest rate and the time to maturity of the bond. A normal yield curve slopes upward, meaning that long-term bonds have a higher yield than short-term bonds. This upward sloping curve indicates that investors demand a higher yield to hold longer-term bonds, as they are taking on more risk by locking up their money for a longer time. An unhealthy or inverted yield curve – However, an inverted yield curve occurs when short-term yields are higher than long-term yields. This situation indicates that investors are willing to accept lower yields on longer-term bonds, which is an indication of their pessimism about the economy's future growth prospects. Essentially, investors are willing to lock up their money for an extended period, accepting a lower yield, because they expect economic conditions to deteriorate. Its implication – i. It is a reliable predictor of an upcoming economic recession. This phenomenon has been observed many times over the years, and every time an inverted yield curve has occurred, a recession has followed. The reason for this is that an inverted yield curve indicates that investors are losing confidence in the economy, which can lead to decreased investment and spending. This, in turn, can lead to a slowdown in economic growth, which ultimately results in a recession. ii. Another implication of an inverted yield curve is that it can make borrowing more expensive for certain individuals or companies. Banks typically borrow at short-term rates and lend at long-term rates, earning a profit on the difference between the two. However, an inverted yield curve makes this process less profitable for banks, and they may become less willing to lend, resulting in a tightening of credit conditions. Attribute – Short-term fixed deposit saver. ie. Keep rolling your 3-month fixed deposit saving or traders trading into the expected volatility. In conclusion, an inverted yield curve, where the current Fed fund rate and 3-month yield is higher than the 30-year yield, is a rare occurrence in the bond market that has significant implications for the economy. It is a reliable predictor of an upcoming recession and can result in higher borrowing costs for some individuals and companies. Investors should be aware of this phenomenon and take it into account when making investment decisions. Some reference for traders: Micro Treasury Yields & Its Minimum Fluctuation Micro 2-Year Yield Futures Ticker: 2YY 0.001 Index points (1/10th basis point per annum) = $1.00 Micro 5-Year Yield Futures Ticker: 5YY 0.001 Index points (1/10th basis point per annum) = $1.00 Micro 10-Year Yield Futures Ticker: 10Y 0.001 Index points (1/10th basis point per annum) = $1.00 Micro 30-Year Yield Futures Ticker: 30Y 0.001 Index points (1/10th basis point per annum) = $1.00 Disclaimer: • What presented here is not a recommendation, please consult your licensed broker. • Our mission is to create lateral thinking skills for every investor and trader, knowing when to take a calculated risk with market uncertainty and a bolder risk when opportunity arises. CME Real-time Market Data help identify trading set-ups in real-time and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
CBOT_MINI:2YY1!Long
by konhow
The yield curve has to un-invert eventually… right?Those who have been reading our past 2 ideas will know we’ve been harping on and on about expected rate path and policy timelines. Why the recent obsession you ask? Because we think we’re on the cusp of major turning points. So, for the third time, let’s look at the market’s expected policy rate path. With FOMC coming up this week, we are expecting a 25bps hike followed by some commentary/guidance on the next cause of action. Based on CME’s Fedwatch tool, markets are expecting a last hike of 25bps in the March FOMC before a pause in the hiking cycle. Now keep that in mind. One interesting relationship we can try to observe is how the 2Yr-10Yr yield spread behaves in relation to where the Fed’s rate is. We note a few things here. Firstly, the ‘peak’ point of the 2Yr-10Yr spread seems to happen right around the point when rate hikes are paused. With the Fed likely to pause as soon as March, we seem to be on the same path, setting up for a potential decline in the spread. Secondly, the average of the past 3 inversions lasted for around 455 days, and if you count just the start of the inversion to the peak, we’re looking at an average of 215 Days. Based on historical averages, we are past the middle mark and have also likely peaked, with current inversion roughly 260 days deep. Looking at the shorter end of the yield curve, we can apply the same analysis on the 3M-10Yr yield spread. The ‘peak’ point of the 3M-10Yr yield spread is marked closer to the point when the Fed cuts, except in 2006, while the average number of days in inversion was 219 days and the average number of days to ‘peak’ inversion was 138 days. With the current inversion at 105 days for the 3M-10Yr Yield spread, we are likely halfway, but the peak is likely not yet in. (Although eerily close to when the Fed is likely to announce its last hike, March FOMC, 51 days away). Comparing the 2 yield curve spreads, we think a stronger case can be made for the 2Yr-10Yr spread having peaked and likely to un-invert soon. Handily, CME has the Micro Treasury Yield Futures, quoted in yield terms, which allows us to express this view in a straightforward manner allaying the complications with DV01 calculation. We create the short yield spread position by taking a short position in the Micro 2-Yr Yield Futures and a long position in the Micro 10-Yr Yield Futures, at an entry-level of 0.623, with 1 basis point move equal to 10 USD. The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com Disclaimer: The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description. Reference: www.cmegroup.com www.cmegroup.com
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CBOT_MINI:2YY1!Short
by inspirante
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