May 15. Curve flattens further
Curve continues to be steamrolled as ten year note yield fell 6 bps to 1.78%. 2/10 down 7 bps to 151. New lows in reds to all deferred contracts with red/green at just 25.5 bps and red/gold down nearly 11 bps to only 137.5. I think red/gold is too low relative to treasury curve (and rates in general); probably worth buying red/gold pack spread and buying some ten year treasury calls as a hedge. In fact, I have just done some of this trade for myself, using EDU13/U16 as the spread, paid 133.0.
–While the curve is at multi-year lows, many “risk” or “liquidity driven” markets are at or near lows for this year. For example Crude has made a new low. Copper is the lowest it’s been since early January. Same thing with India’s Sensex or Korea Kospi, or silver or gold. In fact, US equities have held in remarkably well as SPM started the year around 1260-1280 vs 1340 now. While US commentators wring their hands about recent equity losses, non-dollar investors have been rewarded by using US stocks as a safe haven, with the added benefit of dollar appreciation.
–The question now is whether circumstances that have been driving recent price action abate or accelerate. I lean toward the latter as these moves have a tendency to feed on themselves, and central banks are being perceived more like the man behind the curtain rather than the all-powerful Wizard of Oz. (The next FOMC is a long month away). In the old days during times like this we might get rumors of “emergency Fed meetings” to make things more interesting, now we just get flying monkey Fed speakers that transparently guide us to fields of sleep inducing poppies, otherwise known as the next rounds of QE.
