Diary of a Financier

Front-End Treasury Spreads Comparable to ’94 & ’02

In Capital Markets on Wed 27 Jul 2011 at 22:51
  • The market is finally showing its concern for the US debt deal, as manifest in IRX’s big jump (among other things).
  • IRX will pull back to ~0.56 within a week–maybe the crescendo of European crisis & resolution to US debt deal.
  • However, IRX is drawn to 1.00 over coming weeks-month.
  • Now seeing bear flattening of front-end yields, as expected.
  • FVX-IRX spread (1.451) is coming off highs comparable to bear market cycles in 1994 & 2002.

3-month Treasury yields (.IRX) have torn higher over the past week. From the July 14 low of 0.05, IRX has popped to today’s 0.70 print. For the longest time, the front-end of the Treasury curve resisted a rise because capital was [conventionally] fleeing Europe for the safety of US T-Bills. As of this week, the market is finally expressing concern that a US debt deal may not materialize, and the “safety of US T-Bills” is being questioned.

I can see IRX pulling back to 0.56 in the coming week–perhaps upon the catalyst of Europe’s crisis reaching a crescendo. In the coming weeks-month though, it does look like IRX is drawn to 1.00 even.

Regardless, I’m getting that bear-flattening at the front-end, which I had expected (FVX-IRX spread @ 1.451):

IRX v FVX daily

IRX v FVX weekly

IRX v FVX monthly

I will not capitalize on this trade directly. It takes much bigger money (and leverage) than I manage to multiply the pennies a trader can wring from this. The resonance of the charts is important for my overall positioning, however. Look at the spread on that monthly overlay of IRX/FVX. The spread today is hovering near its upper bound, comparable to the spreads before market massacres in 1994 & 2002. In those periods, Fed easing saved the day. That’s not an option in today’s ZIRP regime.

–Romeo

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