Treasury Tuesday's (On Wednesday... Sorry)

Hey All, 

Treasury Tuesday's is making a return this week and yes, I know, it's Wednesday. Apologies this is a day late but I thought better late than not at all! 

This one will be fairly brief. I just want to touch on where we are now in US and European Rates, and outline my short-term views for likely action in the coming weeks. 

Where are we now? 

So in the US, there have been sone pretty startling moves higher in all tenors of bonds over a 1 month horizon. The 2y really stands out - rocketing 45bps higher in just a month! Yet, the longer maturity bonds haven't jumped quite so much - so what we have is actually significant flattening in the curve at the long-end over the lsat month. It seems then that we could actually be heading for a long-end yield curve inversion, and this is part of my thesis behind why I believe the Fed will be slower to act than the market is pricing. The Fed does not want to create the perverse incentives that long-end yield curve inversion could bring! 

The yield curve below shows that actually between 20y and 30y periods we already have an inversion. 

In Europe: 

If you thought the MoM moves in the US were dramatic, wait until you look at the Bunds above - a whopping move higher in the 10y Bund by 26bps which actually takes it above 0. 

If we look at all the negative yielding debt in Europe, there has been a tremendous decline. 

In fact, rates markets are now pricing in 2 hikes from the ECB by the end of 2022. Wait... hold up! Two hikes!! This is madness. I am one to take the other side of this bet by particularly focusing on playing the 5y and 10y. This market has definitely moved too far too fast. 

One question I had recently was on EURUSD, with the Fed hiking a lot and the ECB not, does it make sense to get short EURUSD. My answer to this is... no. The Fed hikes are fully priced in via FX markets and therefore it is my view the Fed is more likely to be more dovish than the mark expects and the ECB could still be that little bit more hawkish. 

I think a much cleaner trade for the USD is to short it against those CBs which are certainly among the most hawkish and pivoting fast. AUD and others look a bit more attractive. 

Also for this report, I had a fairly in-depth look at DXY performance versus periods of significant yield curve flattening / steepening and couldn't come up with much conclusive evidence. I will keep looking as I suspect there is something worth seeing, but the below scatter plot isn't very helpful! 

I'm going to keep digging on this flattening story as I'm sure there must be some exciting correlations I can try and find... but will keep you posted on that one. 

Please do reach out with your questions as always. Treasury Tuesday's will return in a fortnight (unless something particularly notable happens this week).