I have been following this chart for months now. I still believe US 5y/10y steepener is going to be one of the big trades in 2019, and as I see some further improvement on the weekly chart, I'd like to give some update:
- Ichimoku setup is still neutral (Price is in cloud) but it's developing further bullish bias ahead as we have an early bullish cross in Senkou A (17,5 weeks average) and Senkou B (52 weeks average) lines ahead. We call it a bullish forward Kumo twist. We also see a medium bullish Tenkan (9 weeks avg)/Kijun (26 weeks avg) position within the spot Kumo (cloud).
- The spread is flirting with the 18-20 bps (0,18 - 0,20 %) key level, which is a very important technical reversal point.
- EWO is positive, and Price (yield spread) continously holds above Kijun Sen (26 weeks average)
- Momentum indicators are slowly picking up.
Note:
Enterring this trade is possible only if you have a larger trading account, since you can only trade the bond curve through 5y and 10y futures contracts. Also you have to calculate with risk and duration weighting, which means if you short 1 contract of ZNM9 (10y futures), you have to buy a risk adjusted 1,59 contract ZFM9 (5y futures). Obviously you cannot buy fracture amounts in ZF, which means if you really want to have a risk adjusted 5y/10y spread, you have to take minimum 8k long in ZFM9 vs 5k short in ZNM9. At current prices it equals to a position of 914.160 USD notional in ZF + 610.700 USD notional in ZN.
Conclusions:
1. In case the 5y/10y spread really starts to steepen, it means 5y bond will outperform and would always be a better risk/reward to buy if someone was thinking about outright long in bonds.
2. As the individual bond charts have bullish bias too, we should see a so called bull steepening of the curve, which means that yields go lower in a trend, but front end yields drop more and quicker. This kind of change after the previous extreme curve flattening can be a second stage warning for a possible slowdown or maybe even for a coming recession in the US economy. Obviously market would start to price in some kind of easing cycle from the FED. So far market has just reacted to the chicken FED pausing its rate hike cycle, but whenever the bond market believes something real bad is ahead, or else macro numbers start to justify the possible recession scenario, the steepening will accelerate.
We are holding our initial 1 Risk Unit steepener position, keeping our eyes on the next key level around 25-27 bps (0,25-0,27 %). Our position ratio is 2,5:1, which means that besides the 1,59:1 spread we keep outright long in $ZF too.
- Ichimoku setup is still neutral (Price is in cloud) but it's developing further bullish bias ahead as we have an early bullish cross in Senkou A (17,5 weeks average) and Senkou B (52 weeks average) lines ahead. We call it a bullish forward Kumo twist. We also see a medium bullish Tenkan (9 weeks avg)/Kijun (26 weeks avg) position within the spot Kumo (cloud).
- The spread is flirting with the 18-20 bps (0,18 - 0,20 %) key level, which is a very important technical reversal point.
- EWO is positive, and Price (yield spread) continously holds above Kijun Sen (26 weeks average)
- Momentum indicators are slowly picking up.
Note:
Enterring this trade is possible only if you have a larger trading account, since you can only trade the bond curve through 5y and 10y futures contracts. Also you have to calculate with risk and duration weighting, which means if you short 1 contract of ZNM9 (10y futures), you have to buy a risk adjusted 1,59 contract ZFM9 (5y futures). Obviously you cannot buy fracture amounts in ZF, which means if you really want to have a risk adjusted 5y/10y spread, you have to take minimum 8k long in ZFM9 vs 5k short in ZNM9. At current prices it equals to a position of 914.160 USD notional in ZF + 610.700 USD notional in ZN.
Conclusions:
1. In case the 5y/10y spread really starts to steepen, it means 5y bond will outperform and would always be a better risk/reward to buy if someone was thinking about outright long in bonds.
2. As the individual bond charts have bullish bias too, we should see a so called bull steepening of the curve, which means that yields go lower in a trend, but front end yields drop more and quicker. This kind of change after the previous extreme curve flattening can be a second stage warning for a possible slowdown or maybe even for a coming recession in the US economy. Obviously market would start to price in some kind of easing cycle from the FED. So far market has just reacted to the chicken FED pausing its rate hike cycle, but whenever the bond market believes something real bad is ahead, or else macro numbers start to justify the possible recession scenario, the steepening will accelerate.
We are holding our initial 1 Risk Unit steepener position, keeping our eyes on the next key level around 25-27 bps (0,25-0,27 %). Our position ratio is 2,5:1, which means that besides the 1,59:1 spread we keep outright long in $ZF too.
