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Is It (Seasonally) Time To Turn To Steepeners?
09-12-2017, 04:08 PM,
#1
Is It (Seasonally) Time To Turn To Steepeners?
Is It (Seasonally) Time To Turn To Steepeners?

<p><em><a href="http://themacrotourist.com//macro/air-steepeners">Authored by Kevin Muir via The Macro Tourist blog,</a></em></p>
<p>All credit for the first part of today&rsquo;s post goes to <a href="https://twitter.com/longconvexity?lang=en">LongConvexity</a>, the mysterious Ari-Gold-type hedge fund manager, who reminded me of the<strong> enormous seasonal effect in the US 5/30 year treasury yield curve spread.</strong></p>
<p><a href="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/09/10/20170912_steep.png"><img height="587" src="http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2017/09/10/20170912_steep_0.png" width="500" /></a></p>
<p>For the past eight years, the US yield curve has been flattening like a banshee, with the 5/30 spread declining from 300 basis points, all the way to the current 102 bps.</p>
<p><a href="http://themacrotourist.com/images/2017/09/530Sep1217.png"><img alt="http://themacrotourist.com/images/2017/09/530Sep1217.png" src="http://themacrotourist.com/images/2017/09/530Sep1217.png" style="width: 500px; height: 370px;" /></a></p>
<p>Having a look at that chart, it&rsquo;s difficult to find a period where the curve consistently steepened. <strong>But if we pull up the seasonal matrix, it becomes a little more obvious.</strong></p>
<p><a href="http://themacrotourist.com/images/2017/09/SeasSep1217.png"><img alt="http://themacrotourist.com/images/2017/09/SeasSep1217.png" src="http://themacrotourist.com/images/2017/09/SeasSep1217.png" style="width: 500px; height: 370px;" /></a></p>
<p><strong>January has been the best month for steepening, but right behind, is September.</strong></p>
<p>If you remove the terrible 2011 performance, then September is almost every bit as good as January.</p>
<p><strong>I am a big, huge, Alaskan Peninsular grizzly of a bear when it comes to fixed income, but sometimes I need to find ways to express that view without just putting it all on the dark side. </strong></p>
<p>Playing for a bear steepener is a great way to limit my exposure, and hopefully participate in a long end led down move.</p>
<h3><u>The trade&rsquo;s mechanics.</u></h3>
<p>Although bond traders are familiar with putting on yield curve spread trades, some of us that dabble in many markets, are not quite so well versed. So I have provided the Bloomberg PDH2 hedging screen shot.</p>
<p><a href="http://themacrotourist.com/images/2017/09/PDH2Sep1217.png"><img alt="http://themacrotourist.com/images/2017/09/PDH2Sep1217.png" src="http://themacrotourist.com/images/2017/09/PDH2Sep1217.png" style="width: 500px; height: 370px;" /></a></p>
<p><strong>To institute the trade, you need to buy 100 five year futures for every 24 long bonds that you sell. </strong>Obviously for non-institutional traders, you could tame that down to something like 12 fives versus 3 thirties. That works out to approximately $600 per basis point. So if the 5/30 spread moved up 10 bps, then that should equal $6k.</p>
<p>I still hold to my belief that the bond market is set up for a big disappointment. Massive supply is coming down the pike. With the recent US dollar sell off, inflation is due to increase, and the hurricanes might finally resurrect the long-left-for-dead Phillips curve. <em><u><strong>Buying 5/30 steepeners here at 102, risking down to 92, and hoping for a move back up to 130 is my new trade</strong></u></em>.</p>
<p><strong>If it doesn&rsquo;t work, then take some advice from that great trader, Ari Gold&hellip;</strong></p>
<p><a href="http://themacrotourist.com/images/2017/09/AriFairSep1217.gif"><img alt="http://themacrotourist.com/images/2017/09/AriFairSep1217.gif" src="http://themacrotourist.com/images/2017/09/AriFairSep1217.gif" style="width: 501px; height: 282px;" /></a></p>
<p>*&nbsp; *&nbsp; *</p>
<h3><u>Eurostoxx update</u></h3>
<p>I have been patiently waiting for the Eurostoxx index to break out of the past five-month downtrend.</p>
<p><strong>Yesterday it finally cleared that hurdle.</strong></p>
<p><a href="http://themacrotourist.com/images/2017/09/SX5ESep1217.png"><img alt="http://themacrotourist.com/images/2017/09/SX5ESep1217.png" src="http://themacrotourist.com/images/2017/09/SX5ESep1217.png" style="width: 500px; height: 370px;" /></a></p>
<p>Up, up, and away? I am keeping my fingers crossed, and more importantly, am now looking for places to add to my long.</p>


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