It's obvious that the Fed has to continue Treasury purchases to keep rates suppressed; the Federal debt is so huge at this point (and the fact that financial fallout from covid isn't even close to resolved) indicates to me that yield curve pinning is likely part of our future.
If the Fed pins yields, they're likely to start out towards the front end of the curve. That means we'd see shorter duration yields drop, e.g. they might decide to pin the 5Y to zero.
Everyone's talking about inflation these days, so it isn't beyond belief that 30Y bond yields might pop up. This is the leg of the trade I'm most uncertain about. It seems not unbelievable to me that 35 year bond bull market continues, and asset inflation keeps pumping 30Ys.
In any case, the trade here would be a duration-weighted, delta-neutral curve trade. You might buy 5Y treasury futures and sell 30Y futures at a 4:1 ration to account for differences in duration. As you can see on the chart here, there seems to be a cyclical pattern whenever the Fed starts to dramatically intervene in the rates market. It would fit historical patterns that the 5Y-30Y rate continues to head lower.
At least partial credit to this idea goes to Kevin Muir.
If the Fed pins yields, they're likely to start out towards the front end of the curve. That means we'd see shorter duration yields drop, e.g. they might decide to pin the 5Y to zero.
Everyone's talking about inflation these days, so it isn't beyond belief that 30Y bond yields might pop up. This is the leg of the trade I'm most uncertain about. It seems not unbelievable to me that 35 year bond bull market continues, and asset inflation keeps pumping 30Ys.
In any case, the trade here would be a duration-weighted, delta-neutral curve trade. You might buy 5Y treasury futures and sell 30Y futures at a 4:1 ration to account for differences in duration. As you can see on the chart here, there seems to be a cyclical pattern whenever the Fed starts to dramatically intervene in the rates market. It would fit historical patterns that the 5Y-30Y rate continues to head lower.
At least partial credit to this idea goes to Kevin Muir.