Thank you once again for a great write-up. This was really a deep look into various global markets, I truly enjoyed it.
Regarding your view about the steepening of the curve (2s10s I'm assuming?) in the U.S., I have the same view, but I'm having some hard time thinking about expressions, because I'm not sure if the steepening will be a bullish, a bearish or a combinated one.
The 2s could come lower as the market starts digesting the weakness in hard data you reference in your post, but at the same time, you clearly show that futures traders in SOFR al already pricing in more cuts than the 2 that the Fed showed in the dot plot.
(I have a question here regarding how to assess what's priced in. If I look at CME fed watch tool-which I've heard is not perfect at all- I see december 25 probabilities clearly sitting in two cuts, much like the Fed stated. So what would you trust more, CMEs tool or SOFR futures?)
Political risk could also get more priced in, as you point out, if the market gets convinced that Trump will apoint an "ultra" dovish chair.
At the same time, 10s could drive a bear steepening as inflation is repriced higher and, if you'll allow, as credit creation + deficits keep pointing to a nominal GDP that remains resilient.
My doubt comes from the following: if the 2s reprice lower (lower rates) given economic concerns, then real rates in the long end will come down as well, so a long 2s short 10s could backfire, I think.
Yes, I think you can look at 2s10s or 2s30s steepener trades. Personally, I prefer the very long-end. I think 30y yields are not pricing enough term premium and the Fed is under more pressure to cut recently. Some of the FOMC members, e.g., Waller and Goolsbee, seem more dovish too and could turn against Powell if the next inflation report doesn’t reflect a material acceleration.
But keep in mind that steepeners are a consensus trade. I don’t have any position on right now. If you’d want to trade it, the easiest way to execute such trades is duration-matched with futures. Alternatively, I think there are 2s10s yield curve ETFs which you can trade.
SOFR pricing and the CME tool are quite similar. However, there are timing mismatches, i.e., the CME’s tool references FOMC dates, but SOFR futures price where the Fed funds rate will be at the delivery date of the future.
Dear Mr. Repo,
Thank you once again for a great write-up. This was really a deep look into various global markets, I truly enjoyed it.
Regarding your view about the steepening of the curve (2s10s I'm assuming?) in the U.S., I have the same view, but I'm having some hard time thinking about expressions, because I'm not sure if the steepening will be a bullish, a bearish or a combinated one.
The 2s could come lower as the market starts digesting the weakness in hard data you reference in your post, but at the same time, you clearly show that futures traders in SOFR al already pricing in more cuts than the 2 that the Fed showed in the dot plot.
(I have a question here regarding how to assess what's priced in. If I look at CME fed watch tool-which I've heard is not perfect at all- I see december 25 probabilities clearly sitting in two cuts, much like the Fed stated. So what would you trust more, CMEs tool or SOFR futures?)
Political risk could also get more priced in, as you point out, if the market gets convinced that Trump will apoint an "ultra" dovish chair.
At the same time, 10s could drive a bear steepening as inflation is repriced higher and, if you'll allow, as credit creation + deficits keep pointing to a nominal GDP that remains resilient.
My doubt comes from the following: if the 2s reprice lower (lower rates) given economic concerns, then real rates in the long end will come down as well, so a long 2s short 10s could backfire, I think.
Would love your thoughts here.
THank you once again!
Truly appreciate your pieces.
BEst,
Valentino
Hey Valentino,
Thank you for the comment - I appreciate it!
Yes, I think you can look at 2s10s or 2s30s steepener trades. Personally, I prefer the very long-end. I think 30y yields are not pricing enough term premium and the Fed is under more pressure to cut recently. Some of the FOMC members, e.g., Waller and Goolsbee, seem more dovish too and could turn against Powell if the next inflation report doesn’t reflect a material acceleration.
But keep in mind that steepeners are a consensus trade. I don’t have any position on right now. If you’d want to trade it, the easiest way to execute such trades is duration-matched with futures. Alternatively, I think there are 2s10s yield curve ETFs which you can trade.
SOFR pricing and the CME tool are quite similar. However, there are timing mismatches, i.e., the CME’s tool references FOMC dates, but SOFR futures price where the Fed funds rate will be at the delivery date of the future.
I hope this helps!
It really does help, Mr. Repo!.
Thank you so much.
I'll think about the trade a little bit more before doing anything.
Thank you for the asnwer!