WTI (aka 'EARL) is a Transitorian
want to express a curve STEEPENING bias, 20s30s a DIPportunity
The following VIEW sent out earlier today when NY took the baton from the overseas risk OFF move which was benefiting the longer-end of the yield curve more than anything else.
As we flip ON the screens and take the baton from overseas desks and narrative creators who will decry RISK OFF in unison, I’ll be brief.
WTI (aka ‘Earl’) may in fact be a card carrying member Transitorian. The visual just below comes from this mornings Technicals and contextualizes a longer-term RANGE of oil and higher and rising clearly has had an impact on CPI. Stopping dead in its tracks at / near TLINE around $76.50 (double top double talk up next?) has my attention. Perhaps ‘Earl’ himself was one of the 62.23% of INDIRECT BIDDERS at yesterday’s stellar 20yr auction?
But I digress and lower OIL in context. Said another way:
Nothing without consequence … Lower OIL certainly helps alleviate some inflation fears and pressures SO one can feel less badly BUYING LONG BONDS. The 30yy visual below ALSO comes from this mornings Technicals
And yet, haters gonna hate, sellers gonna sell and shorts remain in the sites of the ongoing STOP HUNT.
This mornings Technicals as a reminder, some out there STILL carrying around a short and will be taken out overnight in the move BELOW 1.87.
We’ll await to hear from others who’ve recently expressed even MORE confidence in, say, STAYING SHORT 10s and IN Z2Z4 STEEPENERS.
As in the past, my only recommendation to accompany said Z2Z4 steepeners was initially a LONG 5s. That had helped to some degree as an offset to the less than optimal ‘win win’ Z2Z4 steepener. While I get the logic OF it and could very well have agreed, I continue to look for other ways to generate a few basis points here and there which leads me to this.
IF, say, you want to bet on higher rates and love steepeners, how about hedging your Z2Z4 sure thing with a 20s30s steepener?
First, the Z2Z4 steepener with some LEVELS as it TRIANGULATES for those inclined to trade IT (instead of, say, CASH 5yy):
There are many ways to contextualize what is going on but simply, the Z2Z4 steepener is a clean a bet on end of 2023 Fed Funds as any out there. Volumes in this Z2Z4 steepener have perked up (again) and while that makes some sense in light of recent FEDSPEAK and minutes, the Fed chair has been nothing if not consistently reminding that the VIRUS is in charge.
Yesterday’s Sell Side Observations noted ZENTNER of MS downgrading GDP call because of the virus. This morning it is Goldilocks
As I noted YESTERDAY -- it wasn’t ever ONLY about the US growth profile as G10 SURPRISES were adjusting lower rapidly (now firmly NEGATIVE).
Global Wall Street based largely in NYC is now forced to mark FORCASTS to market a bit more (still wildly optimistic in HOPES this too shall pass) and as they do, markets are still pricing to perfection.
But I digress … Z2Z4 steepeners / win win trade may EVENTUALLY be great and while you wait, we may be looking AT a grand DIPportunity.
As far as WHY one might entertain BUYING 20s is quite simply a supply vs demand dynamics. It’s widely anticipated the Treasury will be more than fully funded and REDUCING coupon issuance and the widely accepted idea (see steepening channel from June until YESTERDAY) is that there will be LESS 20yrs offered going forward.
Expecting a reduction in November or February.
Buy what there will be less of and bond BEARS then could fund said purchase by SELLING 30s.
AND when you put the ideas / concepts together on a single page here is what you get:
Let me know what YOU think and of YOUR interpretation of the latest economic and markets INKBLOT test.
Agree or not, happy to dialogue and figure out how to generate a few extra basis points in your portfolio, P&L or how best to manage the hedge...
AND FOR MORE, HERE IS today’s 2pg PDF …