The Yield Curve, The Dollar and the Government Shutdown

Renewed Focus and Trading Activity on the Yield Curve

There is renewed focus and trading activity on the yield curve and yield curve spreads given the U.S. government's shutdown and its impact on global financial markets. @AntoineGara reported on TheStreet.com Wednesday that the U.S. Treasury Bill curve inverted, with October 2013 maturities yielding more than November 2013 maturities.

This morning's news wires are cracking with reports that a 6 week deal of some sort is likely. Whammo!, a fresh look at the T-Bill curve shows December 2013 T-Bills now yielding more than January 2014 T-Bills. The yield curve inversion walked right out to the new point of uncertainty. If the rumored 6 week budget deal collapses, rest assured that the inversion will run back in to October.

This front end yield curve inversion impacts many markets - currency markets, eurodollars and the TED spread in particular. The Aussie dollar and the Euro are up again the U.S. dollar this morning. The TED Spread moves abnormally wider versus T-Bills over the inverted section of the yield curve.

U.S. Treasury Futures Yield Curve Spreads and cash U.S. Treasury Yield curve Spreads closed steeper across the curve yesterday reflecting the markets increased risk premium.

Futures and Cash Yield Curve Spread Market Overview

Trading Implications

Through the bulk of September, the 2s5s (TUF: 80 bps) futures yield curve spread and the 5s10s (FYT: 88 bps) futures yield curve spread flattened. The recent uncertainty reversed the flattening trend and TUF and FYT moved steeper. The TUF spread at 88 bps is 5 bps below its 50-day moving average. The FYT spread at 80 bps closed 3 bps north of its 50-day moving average.

2s5s (TUF) and 5s10s (FYT) Charts

The 10s-Bonds (NOB: 124 bps) futures yield curve spread steepened throughout September. NOB closed at 124 bps last night, 2 bps greater than its 50-day moving average and 1 bp above the intermediate term 62.8% Fibonacci level. Note that the NOB hedge ratio from the CME (currently 2:1) is off significantly. Don't let tail risk erode your performance.

10s-Bonds (NOB) Chart

Both cash and futures yield curve spreads are dynamic. Curve spreads react to economic data and monetary policy news while providing trading opportunities. CurveTrades tools and data allow you to recognize and develop your strategy as well as effectively manage risk.

RIDE THE CURVE!