30-Year Yield Futures Trade Ideas — CBOT_MINI:30Y1!

Front-Running Yield Curve Normalisation on Rate Cut Anticipation The (in)famous Yield Curve remains inverted. In recent past, spreads normalized only to revert to inversion as rate cut expectations got pushed out. This time though, is different. Recent CPI print has significantly altered market sentiment. The likelihood of an initial rate cut at the September FOMC meeting now exceeds 90%. Consequently, the yield curve is normalizing once more. Current market signals indicate that this normalization could be enduring. WHY IS THE YIELD CURVE INVERTED? The present yield curve inversion indicates that investors do not expect that rates will remain this elevated for long. While 2Y treasuries continue to be re-issued at higher rates, expectations for longer terms such as 10Y and 30Y are lower as they factor in that rates will normalize from their present levels. YIELD CURVE WILL NORMALIZE SOON, WHAT WILL DRIVE IT? While this is the longest period of yield curve inversion in history, the curve has started to normalize. The factors driving normalization in the yield curve were previously discussed. Ordinarily investors demand higher rates for longer-duration treasuries to account for the higher inflation expectations and greater risk. Either inflation must fall, or inflation adjusted treasury yields for longer maturities must rise. Rate cuts will also drive the normalization in the yield curve. The yield spread between 2Y & 10Y treasuries tends to rise in the two months preceding the first rate cut in a cutting cycle as observed in the past. The impact of rate cuts on the 2Y-10Y spread is even more pronounced in the two months following the first-rate cuts. UNCERTAINTY IN MACRO ECONOMIC DATA IS DISSIPATING Make no mistake, the broader picture remains uncertain. However, recent data points to recovery. Chicago PMI showed a sharp recovery in July. But the job market signals uncertainty. Continuing jobless claims remain elevated. Job openings have fallen. But job creation in the last two non-farm payroll prints were above expectations. US Retail sales and industrial production have improved. The impact can be observed through the consistent increase in the GDPNow forecast for Q2 GDP since 12/July. Source: GDPNow The June CPI release showed uncertainty easing. Headline CPI cooled sharply as it fell on a MoM basis. Notably, the stickier core CPI also continued to cool as it fell to 3.3%. However, inflation remaining sticky at the 3% level remains a grave concern. Even if a recession does arrive in the coming months, the 10Y-2Y yield spread is likely to have normalized by then. Yield curve inversion is observed only before recessions not during. RAPID RATE CUTS EXPECTED IN THE COMING YEAR Source: CME FedWatch The rate cuts outlook has improved substantially. FedWatch signals that rates will fall by 100 basis points by March 2025 (as of 19/July) suggesting successive cuts. Other analysts are even more optimistic. Analysts at Citi bank hold the view that rates will be slashed by 200 bps (2% in total), starting in September across eight successive FOMC meetings (25 bps at each) by the summer of 2025. CERTAINTY IN RATE OUTLOOK SUGGESTS YIELD CURVE NORMALIZATION Major moves in the yield curve have only come through after commencement of rate cuts in the past. This time, markets may front-run these expectations. The attempts to front-run rate cuts were already observed in December when the yield spread recovered sharply after the Fed signaled six potential rate cuts in 2024. Presently, the 10Y-2Y yield spread is trading below those levels and has the potential to break out as we approach September rate cuts. The risk of a reversal remains but it is lower. Higher rates pose a systemic risk for the US given its profligate borrowing. Higher rates on treasuries are untenable for much longer. Cost of servicing public debt in June hit USD 140 billion and totaled USD 868 billion in the first nine months of the current fiscal year (33% higher YoY). For reference, the total budget deficit for this period was $1.27 trillion. The interest burden is weighing heavily on the overall budget deficit. HYPOTHETICAL TRADE SETUP Treasury auctions are a sound guide to maturities selection when positioning for yield curve normalization. The recent demand for treasuries at the latest auctions has been low. Bid-to-cover ratio for all (2Y, 5Y, 10Y, and 30Y) was lower than the average bid-to-cover over the prior ten auctions. Demand was weak for the 10Y treasuries. Demand for 30Y treasuries has also been lower than previous auctions but has remained more consistent than 10Y. The yield spread between 30Y-2Y treasuries has outperformed the 10Y-2Y spread over the past 2 months. Investors can seize opportunities from normalization in the 30Y-2Y spread using CME Yield futures. The CME Yield futures are quoted directly in yield with a one basis point change in the yield representing a P&L of USD 10. As yield futures across various maturities represent the same notional, to calculate the spread P&L is equally intuitive with a one basis point change in the spread between two different maturities also equal to USD 10. The hypothetical trade setup consisting of long 30Y and short 2Y is described below. • Entry: -2.6 basis points (bps) • Target: +25 bps • Stop Loss: -25 bps • Profit at Target: USD 276 (27.6 bps x USD 10) • Loss at Stop: USD 224 (22.4 bps x USD 10) • Reward to Risk: 1.24x 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.

Yield Curve Inverts Further on Rising Recession Risk As the tides of economic fortune ebb and flow, a spectre of recession looms over the horizon, whispering in the rustling of Treasury yields and the shifting sands of macroeconomic indicators. Recent economic data has painted a complex tableau of financial uncertainty. From declining PMI figures to a palpable deceleration in GDP growth, the economic forecast has shifted, stirring speculations that Fed may be forced to cut rates should the US economy slip into recession. Uncertainty around the timeline of rate cuts plus a potential looming recession are causing the yield curve to invert once more. Investors can obtain exposure using CME yield futures with a reward to risk ratio of 1.6x. RECESSION SIGNALS ARE FLASHING AGAIN Monetary policy winds are starting to shift once more. Recent economic data, including PMI figures, and a sharply weaker GDP in the US have led participants to increase their expectations that the US Federal Reserve (“Fed”) will have to relent and cut rates in 2024. Source: CME FedWatch Over the past month, probability of a rate cut at 7/Nov policy meeting has increased from 42% to 47%. More notably, the probability of a second rate cut at the 18/December policy remains slightly elevated over the past week at 35%. Typically, rate cuts suggest that the Fed is nearing its dual goals of maximum employment and stable prices. However, current expectations for rate cuts may stem from distinct reasons. Inflation remains persistent. Fed officials remain steadfast in their battle against inflation. But inflation is stalled at 3%. Higher rates are instead starting to impact economic growth. As rates remain high, the odds of an economic slowdown rise. On 4/June, job openings in the US fell to their lowest level in three years. On 31/May, the Chicago PMI indicator fell sharply into what is a recession territory. Q1 GDP was revised lower last month. Weak consumption data from the US has led to expectations that GDP growth during Q2 may remain slow. On a similar note, the household jobs survey showed full-time employment declining by 625k in May while part-time employment rose by just 286k. However, not all jobs’ data was negative. The establishment jobs survey showed strong job creation at 272k far higher than expectations of 182k. Additionally, wage growth was above expectations as weekly average earnings rose 0.4% compared to 0.2% in April. The household survey counts each individual only once, regardless of how many jobs they have. In contrast, the establishment survey counts employees multiple times if they appear on more than one payroll. Many observers have been calling for a recession in the US ever since the Fed raised rates to their highest level in 23 years. Yet the US economy has remained robust. Part of the reason behind the resilience has been the savings cushion that US consumers built up during the pandemic. However, with the strong inflation during the past year, most of that cushion has been spent. Consumers have already started to shift their consumption habits and credit usage (and delinquency) has been on the rise. Credit card delinquencies are at the highest level in more than a decade and personal savings built up during the pandemic have been exhausted. ECONOMIC DATA DRIVES BOND YIELDS LOWER AND RE-INVERTS YIELD CURVE Throughout the past 10 days, economic releases in the US have driven bond yields consistently lower. Recent non-farm payrolls data drove a rally in yields. Economic releases have also driven a decline in the yield spreads resulting in further inversion of the yield curve. Since the release of the PCE price index and Chicago PMI on Friday 30/May, the 10Y-2Y spread has declined by nine basis points. The 30Y-2Y spread has performed the worst since then as it stands ten basis points lower. Further, unlike the uptick in yields following NFP, the yield spreads continued to invert further, especially for the 30Y-2Y and 10Y-2Y spread. HYPOTHETICAL TRADE SETUP Historically, the yield spread between 10-year and 2-year Treasuries tends to normalize by the time a recession officially hits the US. Based on current trends, a recession, as indicated by GDP metrics, might not occur until early next year. Currently, the yield curve is deeply inverted, and recession signals are intensifying. Moreover, the possibility of a rate cut remains uncertain. This ongoing uncertainty about the policy direction is further exacerbating the inversion of the 10Y-2Y spread. Another factor to consider is the upcoming US elections. As the Fed strives to remain an independent authority, they may opt to avoid major policy moves before elections are concluded. This week is set to bring several key economic updates, including the May CPI report and the Federal Reserve's revised economic projections. These projections are expected to reveal that rate cuts, previously anticipated for 2024, might be delayed further. The volatility in economic data has made it challenging to assess the yield trends. Despite a general rise in yields, the yield curve continues to invert, particularly the 30Y-2Y spread, which has been the most adversely affected. This reflects ongoing investor concerns about long-term Treasuries as expectations for rate cuts are pushed further into the future. Source: CME CurveWatch Investors can obtain exposure to a further inversion in the 30Y-2Y spread using CME Yield futures. CME Yield futures are quoted directly in yield with a one 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 one basis point change in the spread between two separate maturities also equal to USD 10. The hypothetical trade setup using the 30Y-2Y spread is described below. • Entry: -36.5 basis points (bps) • Target: -50 bps • Stop Loss: -28 bps • Profit at Target: USD 135 (13.5 bps x USD 10) • Loss at Stop: USD 85 (8.5 bps x USD 10) • Reward to Risk: 1.59x 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.

How is Your Trading This Year?30Y Micro Yield ( CBOT_MINI:30Y1! ), Micro Nasdaq ( CME_MINI:MNQ1! ), Chinese Yuan ( CME:CNH1! ), Live Cattle ( CME:LE1! ) On January 2nd, I published an idea titled “Year of the Rabbit: ‘Short-tailed’ Trading”. My outlook for the new year was: “In the new year, uncertainties will remain the key price drivers of global stock markets: central bank policy, inflation, economic growth, geopolitical crisis, and China reopening. Depending on the specific outcome, the impact of a given factor could range from very positive to very negative, and anything in between.” Eight months into 2023, we have witnessed some extraordinary events playing out: • US regional bank crisis shocked the global financial markets. However, swift government actions helped starve off a chain reaction that could trigger systemic risk; • Decades-high US inflation has quickly come down. Fed tightening policy does work, even though it usually has a 10-month lag; • The US debt ceiling has found a resolution. Instead of raising the debt limit, Congress suspected it for two years. In a matter of two months, the national debt has increased by $1.3 trillion. This helped push Fitch to downgrade the US sovereignty rating; • China reopened after three years of Zero-Covid policy. While the economy rebounded in Q1, it quickly deteriorated in Q2. The economic engine seems to lose steam quickly. Trading Strategies Revisited Under these macro backdrops, it’s a good time to revisit some of my own trade ideas. I write on TradingView weekly and have published 31 ideas so far in 2023. Of these ideas, TradingView selected 13 to be featured on “Editors’ Picks”. Below are recaps of four ideas published in July and August. July 10th: Housing Cost Jumps Amid Falling Inflation Trade Idea: Long CBOT 30-Year Micro Yield Futures ($30Y) My theory: • The decline in home sales countered the effect of rising funding cost, putting the mortgage rates in sideway moves. • Now that the housing market recovers, 30-year Fixed could be on the way up. • July FOMC meeting could provide a boost if the Fed raises 25 bp as as indicated by the Fed Watch tool? . Hypothetical Result for Illustration Purpose Only: • Changes in market prices: August contract (30YQ3) was quoted 4.012 on July 7th and 4.381 on August 18th, an increase of 369 points; • Gain (Loss): Each point is worth $1. Therefore, 1 long 30YQ3 would gain $369; • Return: Using the $290 margin as cost base, this trade would have a return of 127%. Where are we now? It’s my long-held belief that the negative yield curve environment would reverse back to normal. Yield spread is finally narrowing. 30Y yield is now higher than 10Y yield. July 24th: Implications of Nasdaq 100 Rebalancing Trade Idea: Spread trade – Buy S&P Technology Select Sector Futures ($XAK) and Sell Micro Nasdaq 100 Futures ($MNQ) My theory: • The Nasdaq 100 rebalancing is a unique issue with the Nasdaq 100 index. It has nothing to do with the fundamentals of these companies and has no impact on other Tech sector stock indexes which also include the same component companies; • In the long run, Nasdaq 100 rebalance will dilute the impact of the largest stocks. Strong growth in Big Tech will be fully represented in XAK but capped in MNQ. Hypothetical Result for Illustration Purpose Only: • Market prices: MNQ and XAK were quoted 1,786.60 and 15,555 respectively on July 21st. On August 18th, they were settled on 1,665.20 and 14,744, respectively. • Trade setup: 1 XAK - 6 MNQ = (1 * 1786.6 * 100) - (6 * 15555 * 2) = 8,000 • Initial margins: 9500 + 1680 * 6 = $19,580 • New Spread value = (1 * 1665.2 * 100) - (6 * 14744 * 2) = 10,408 • Gain (Loss):10,408 – 8,000 = $2,408; • Return: Using the $19,580 margin as cost base, this trade would have a return of 12%. Where are we now? As expected, XAK held up better than MNQ even though both were trending down. August 7th: What Disinflation: Beef Price Went Up 64% in 5 Years Trade Idea: Short Cattle-Hog Spread – Sell Live Cattle ( NASDAQ:LE ) and Buy Lean Hog ( NYSE:HE ) My theory: • In my opinion, the cost factor pushing pork prices up in the short run is greater than the supply-demand force that drives up beef prices in the long run. • There may be room to short the cattle-hog spread, until pork prices stabilize in a new equilibrium. Hypothetical Result for Illustration Purpose Only: • Market prices: LE and HE were quoted 183.10 and 83.25 respectively on August 4th. The cattle-hog spread was 99.85; On August 18th, the new spread was 96.41 (LE 178.53 vs. HE 82.13) • Gain (Loss): The cattle-hog spread was narrowed by 3.44. Since we short the spread, we would gain $1,378 (=3.44 x 400); • Return: Using the $3,200 margin as cost base, this trade would have a return of 43%. Where are we now? Cattle futures were down 2.5% while hog lost 1.4%, which helped narrow the spread. August 14th: CNH – Hedging Currency Risks Trade Idea: Long USD/Offshore RMB Futures ( FWB:CNH ) My theory: • The key drivers in the US/China currency exchange rate: relative interest rates; relative stock market performance; relative economic strength; and the dynamics of the US-China relations. • Yuan could break out of the recent range with USDCNH going above 7.50, if there are more headwinds ahead Hypothetical Result for Illustration Purpose Only: • Market prices: September contract (CNHU3) was quoted 7.2646 on August 11th and 7.2921 on August 18th, an increase of 275 points; • Gain (Loss): Each point is worth 10 yuan. The gain would be 2750 yuan, or $377 at current market price; • Return: Using the $21,100 margin as cost base, this trade would have a return of 1.8%. Where are we now? • Since I published this idea a week ago, the CNH exchange rate broke critical support levels of 7.27, 7.28, 7.29 and 7.30 sequentially; • In my opinion, the government would prioritize stabilizing the economy and monetary easing policies over the task of defending its currency; • A weaker Yuan may be even preferable as a policy tool to support China’s export. Happy Trading. Disclaimers *Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services. CME Real-time Market Data help identify trading set-ups 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

30Y: Housing Cost Jumps Amid Falling Headline Inflation CBOT: 30-Year Micro Yield Futures ( CBOT_MINI:30Y1! ), Treasury Bond Futures ( CBOT:ZB1! ) As a result of runaway inflation and rising interest rates, US home buyers are confronted by high home prices, high down payments, and high monthly mortgage payments. A sneak peek into official housing market data between 2021 and 2023: • Median sales price of houses sold in the US ( FRED:MSPUS ) was $436,800 in the first quarter of 2023, per Federal Reserve Economic Data (FRED); • The median home price was $433,100 in Q1 2022 and $369,800 in Q1 2021. In the span of merely two years, home price jumped 18.1%; • Thirty-year fixed rate mortgage averaged 6.81% on July 6th ( FRED:MORTGAGE30US ); • The same mortgage was quoted at 5.30% a year ago and only 2.90% in July 2021. A typical family of four living in the State of Illinois earned a median income of $113,649 in 2022, according to the U.S. Census Bureau’s survey data. The example cited below illustrates the dramatic rise in housing cost from a family perspective: • If a 30-year-fixed mortgage is taken with a 20% down payment, the upfront cost is $87,360 (20% of FRED:MSPUS at $436,800), which is up $13,400 or 18.1% from two years ago; • Assuming the family’s take-home pay is 75% of gross income, their after-tax income would be $85,237 per year, or $7,103 per month; • Down payment already exceeded annual income. Adding in closing fees, moving cost, appliances and new furniture, upfront home investment could be well over $100K; • Using a mortgage calculator, we find that monthly mortgage payments were $1,724 if the home was bought two years ago; this equates to 24.3% of take-home pay; • New monthly payments would be $2,682, up sharply by 55.6%; mortgage expense now takes up 40.3% of the family’s after-tax income! This shows that an average US family these days can’t afford a median-price new home. A Tale of Two Cities The sharp increase in housing cost flies in the face of official US inflation data. June CPI report will be released on Wednesday. Economists forecast headline inflation to fall to 3.0% from 4.0% and core CPI to be lowered to 5.0% from 5.3% in May. The subset of inflation data shows Shelter cost growing at 8.0% annual rate in May. This doubles the headline CPI but is still a vast understatement for the soaring housing cost. So, where is the disconnection? Here is my theory. High mortgage rates have a bigger impact on mortgage payments than home price appreciation. Based on my calculation, each 1% increase in interest rate would translate into 9% more in monthly mortgage payments. In our example, mortgage rate grew about 4% from 2021 to 2023, and a mortgage is taken on a home priced at 18% higher. The resulting monthly payments jumped 55.6%. The compounding effect of higher prices and higher rates is fatal. I do not foresee either dropping in a meaningful way by next year. Therefore, do not expect the lower inflation to provide immediate relief to home buyers. Housing Market is not likely to crash US new home sales ( ECONOMICS:USNHS ) peaked at 1 million units in October 2021. Since then, it has nosedived and almost cut in half to 550K units by September 2022. Existing home sales ( ECONOMICS:USEHS ) followed a similar trend. It topped out at 6.6 million units in August 2020, and dropped to 4.0 million units in January 2023. Despite the hurdles facing home buyers, the US housing market appears to have recovered. New home sales reached 763K units in May, up nearly 12% from April. Existing home sales were 4.3 million units, up 300K from the beginning of the year. How could the housing market hold up? Isn’t homeownership already beyond reach? According to the National Association of Realtors, 65.5% of US families are homeowners. We could say that those with a “lock-in” rate are insulated from rising housing costs. Homeowners are “trapped” in their home in a rising interest rate environment. If they sell their houses and buy new ones, they will forfeit their 3% mortgage. This explains why existing home sales recovers at a much slower pace than new home sales. Low inventory and fewer sellers relative to buyers, together keep the housing market going strong. Prospective home buyers are not so lucky. But they have options. First is to lower their expectation and buy a smaller home; Second is to downgrade from single family home to townhouse or condominium. Finally, postpone home purchases and continue to rent. Several Economists predicting a housing market crash as big as the 2008 Subprime crisis. I think the Big Shorts would be disappointed this time. Prior to 2008, up to one third of homeowners had adjustable-rate mortgages. They survived rate-reset only because their house value went up. When it didn’t, they couldn’t refinance and defaulted on their loan. These days, adjustable-rate accounts for just 5% of all mortgages. The housing market is healthier now. FRED data shows the mortgage delinquency rate at 1.73% in Q1 2023, and the rate has been declining consistently for seven quarters. How Is This Relevant for Trading? I hold the view that the US housing market is very resilient. As long as the job market does not deteriorate, it could weather significant challenges including higher interest rates, indicating that the demand for home mortgages would stay strong. Whether you buy a new home or an existing one, a single-family home, a townhouse, a condo, or a trailer home, chances are you need a mortgage. The 30-year fixed rate mortgage is the most popular type of home loans in the US. Hence, this is where we should find solutions to manage interest rate risk. Interest rate data shows that the 30-year fixed rate is not closely correlated to the Fed’s interest rate decisions. In the past 12 months, the Fed Funds rate gained 130%, while the 30-year Fixed only moved up 28%. Since last November, the Fed raised interest rates five times, but the 30-year Fixed stayed relatively unchanged. My theory is that the decline in home sales countered the effect of rising funding cost, putting the mortgage rates in sideway moves. Now that the housing market recovers, 30-year Fixed could be on the way up. The July FOMC meeting could provide a boost if the Fed raises 25 bp as the market predicts. There is no liquid financial instrument on the 30-year fixed rate mortgage. However, it is closely correlated to the 30-year Treasury yield. The mortgage rate currently is priced at 2.8% above the Treasury yield. The spread appears to be stable over time. If we are bullish on the 30-year fixed mortgage rate, we could consider the following: One, to set up a short position on CBOT Treasury Bond Futures ( $ZB ). Remember that bond price and yield are inversely related. Rising yield would cause the bond to lose value. Each Treasury Bond futures contract has a face value of $100,000. The price quotation is based on $100 par value. The minimum tick is 1/32 of one point (0.03125), or 1,000/32 = $31.25. SEP contract (ZBU3) is quoted $123 and 22/32 on Monday July 10th. Two, to set up a long position on CBOT 30-Year Micro Yield Futures ( $30Y ). On July 10th, the August contract is quoted 4.029%. Each 30Y contract has a notional value of interest rate times 1000 index points. A move by a minimum tick of 0.001 index point would result in a gain or loss of $1 per contract. What’s the difference between these two? Treasury bond futures are very liquid. It traded 387,170 contracts and had an Open Interest of 1.25 million on July 7th. Micro Yield Futures are more intuitive. If yield goes up, futures price goes up too. The contract is catered to individual investors. Its margin requirement is $290, compared to $4,200 for the bond futures. Happy Trading. Disclaimers *Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services. CME Real-time Market Data help identify trading set-ups 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

More Rate Hikes on the Menu CBOT: Micro 30-Year Treasury Yield ( CBOT_MINI:30Y1! ) President Biden and House Speaker Kevin McCarthy reached an agreement in principle late Saturday to raise the nation’s debt limit and cut federal spending, ending a rollercoaster round of negotiations. The current national debt ceiling is $31.4 trillion. The tentative deal would raise it by $4 trillion through the end of 2024. In return, it would cap annual discretionary spending for two years, keeping non-defense spending levels flat. Future Fed Rate Actions With a US default and potential economic disaster being averted, the Federal Reserve (Fed) would likely stay on its course of fighting inflation. On May 26th, the Bureau of Economic Analysis (BEA) reported the Personal Consumption Expenditures Price Index (PCE) up by 0.4% in April to an annual rate of 4.4%. This surpassed both the market consensus of 3.9% and the March PCE of 4.2%. The Core PCE excluding food and energy is 4.7%, exceeding March level by 0.1%. The surprising rebound in inflation indicates that the Fed’s job is not done, even after it hiked the Fed Funds rate seven times last year and three more times in 2023. CME FedWatch Tool gauges the probabilities of rate hikes based on 30-Day Fed Funds futures pricing data. It shows that, on May 28th, the odds of a 25-bp hike in June FOMC meeting at 64.2%. The probability of raising another 25 bps in July is 27.1%. The futures market does not expect the Fed to cut interest rates before the end of the year. The interest rate market is in disarray, and this may present new trading opportunities. Mortgage Rate Tops 7% On Sunday, May 28th, the average 30-year fixed mortgage interest rate is 7.15%, rising 16 basis points from last week, according to Bankrate.com. This is an annual increase of 1.61%: the 30-year fixed was 5.54% on May 26th, 2022; Prior to the Fed rate hikes, it was only 3.65%-3.85% in February 2022. MORTGAGE30US, the mortgage rate data tracked by the Federal Reserve Bank of St. Louis, records 6.57% on May 25th. Meanwhile, CBOT 30-Year Micro Yield Futures is quoted 3.988% for its May contract last Friday. What does this mean? The 30-year duration interest rate spread between the riskless Treasury rate and a risky mortgage rate is now 258 basis points. For comparison, in September 2021, the same spread was only 80 bps with a 2.1% Treasury yield and a 2.9% mortgage rate. The spread has more than tripled in the past two years. When the Fed started raising rates last year, both Treasury yield and mortgage rate rose. The trends diverged in October. In the mortgage market, banks continued to raise lending rates in response to the actual increases in the cost of capital. In the financial market, “Fed Pivot” expectations weighed on Treasury prices. As the Fed lowered the rate increases from 75 bps to 50 bps and then 25 bps, 10- and 30-Year bond yields fell, while 1-Month and 2-Year yields rose, creating a negative yield curve, or the so-called inverted yield curve. Why Treasury Yield Needs to Catch Up In hindsight, mortgage bankers are proven to be right, while the rate cut forecast by bond investors is premature. With the new twist in inflation data, both bond yield and mortgage rate have the potential to go up further in the coming months. Treasury bond yield has some “catching up” to do as investors adjust their expectations. Here is my logic: Firstly, raising the debt ceiling opens up trillions of dollars of new government borrowing. By the rule of supply and demand, a high demand of money will raise its price, all else constant. Treasury bond yield is the price the government paid to borrow money; Secondly, the last-minute deal on debt ceiling helps avoid a potential economic crisis. The housing market is cooling but unlikely to crash any time soon. This ensures that the higher mortgage rates are here to stay; Thirdly, the large interest rate spread created an arbitrage opportunity for lenders by borrowing from the bond market to fund the mortgage operations with the same maturity; Therefore, the 30-year Mortgage-to-Treasury spread could narrow in the future. Since mortgage rate is not likely to fall, the gap could be closed by a higher Treasury yield. We could express the view of high Treasury yield expectation by establishing a long position in CBOT 30-Year Micro Yield Futures. The June contract 30YM3 is quoted 4.000% last Friday. Each contract has a notional value of 1,000 index points, which equates to $4,000 at current quote. CME Group requires an initial margin of $300 per contract. Current Fed Funds target rate is 500-525 bps. Hypothetically, if the Fed raises 25 bps in June, and 30-Year Treasury Yield goes up by the same amount, a long futures position could gain $250. This would be equivalent to an 83% return, excluding commissions. Long Futures would lose money if the yield falls, by $10 for each basis point movement. The July contract 30YN3 will begin trading this week. I would monitor the opening price to determine if it is still quoted at a discount - below short-term Treasury rate and mortgage rate. Happy Trading. Disclaimers *Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services. CME Real-time Market Data help identify trading set-ups 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

Inverted Yield Curve Starts in 2023 - Explained When the yield of the 3-month bond is higher than the 30-year bond yield, this is known as an inverted yield curve. It is a rare and unusual occurrence and we are seeing this today. This signals a potential economic recession in the future. An inverted yield curve suggests that investors have a pessimistic outlook for the future of the economy. They are willing to accept lower yields on long-term bonds because they anticipate a slowdown in economic growth. In contrast, they demand higher yields on short-term bonds because they expect the central bank to raise interest rates in response to inflationary pressures. An inverted yield curve can lead to a decrease in borrowing and lending activity, as it can make it more expensive for businesses and consumers to borrow money. This can result in a reduction in economic growth and can eventually lead to a recession. 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

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30-Year Yield Futures

30Y1! trade ideas