Time to consider a Interest Rate spread???

Monday, 18 September 2017 08:03 Melissa Moore
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Consider interest rates and the yield curve. Again, market-driven US rates traditionally make their seasonal peak in April/May. Monetary liquidity is tightest then after payment of income taxes has transferred a massive amount of financial assets from out of the private and into the public sector by April 15.

By June, however, that liquidity begins to loosen, continuing to do so through the end of the US fiscal year September 30 as governments need to borrow less and that tax money already collected filters its way back into the private sector. As it does, Treasury instruments all along the yield curve have tended to trend higher, especially into the last days of September. In fact, MRCI has found that December 30-year Treasury Bonds have closed higher on about September 29 than on about September 20 for the last 12 consecutive years and in 24 of the last 27 --- with one of the other three years at breakeven and no loss greater than 0~06.

As discussed here several times, when rates move, the long end of the yield curve usually moves sooner, faster, and farther. Big money is most concerned about long-term survival and advantage, and change is magnified through time. Thus, for example, the Long December 30-year Bonds/Short December 10-year Treasury Notes spread has closed more favorably toward bonds on about September 29 than on about September 20 for the last 17 consecutive years --- suffering no daily closing drawdown whatsoever in 11 of those 17 years and none greater than 0~06. (Each 0~01 is worth $31.25; notes trade in half that amount, quoted as 0~005. Because MRCI plots these spreads in decimal points, we will provide both in the text.)

This spread made its seasonal low right on time last May at 24.4219 (24~135). It then rallied sharply into late June before falling back into a typical interim low in July of 25.8594 (25~275). Once again it rallied sharply, rising to a new high earlier in September of 29.8594 (29~275) --- a move of exactly 4.0000 (4~00).

It has since been pulling back, as is normal seasonally. The seasonal entry this year coincides with the final day of the FOMC meeting, which will be watched closely for clues of future Fed moves to tighten (or loosen!) rates. The market(s) is often volatile immediately after the meeting and even the next day as the potential impact of any rate changes or comments is digested. Will this spread retrace 40-60% of its recent move higher going into the meeting --- and then once again enjoy a final surge into the end of the US fiscal year?

If you have any questions or comments, call me at 541-484-7256 or email This e-mail address is being protected from spambots. You need JavaScript enabled to view it .

Trade 'em

Jerry Toepke

MRCI - Editor & Spread Expert

541-933-5340

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PLEASE REMEMBER:  These are NOT trading recommendations.They are provided for informational purposes only and are intended only as potential ideas based on the market's own performance in the past, but past performance is not necessarily indicative of future results.  Futures trading involves substantial risk of loss.

SEASONAL TENDENCIES ARE A COMPOSITE OF SOME OF THE MORE CONSISTENT
COMMODITY FUTURES SEASONALS THAT HAVE OCCURRED OVER THE PAST 15 YEARS.
THERE ARE USUALLY UNDERLYING FUNDAMENTAL CIRCUMSTANCES THAT OCCUR
ANNUALLY THAT TEND TO CAUSE THE FUTURES MARKETS TO REACT IN A SIMILAR
DIRECTIONAL MANNER DURING A CERTAIN CALENDAR PERIOD OF THE YEAR.  EVEN
IF A SEASONAL TENDENCY OCCURS IN THE FUTURE, IT MAY NOT RESULT IN A
PROFITABLE TRANSACTION AS FEES AND THE TIMING OF THE ENTRY AND
LIQUIDATION MAY IMPACT ON THE RESULTS.  NO REPRESENTATION IS BEING MADE
THAT ANY ACCOUNT HAS IN THE PAST OR WILL IN THE FUTURE ACHIEVE PROFITS
UTILIZING THESE STRATEGIES.  NO REPRESENTATION IS BEING MADE THAT PRICE
PATTERNS WILL RECUR IN THE FUTURE.  HYPOTHETICAL PERFORMANCE RESULTS
HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW.  NO
REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO
ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.  IN FACT, THERE ARE
FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS
AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING
RESULTS PROGRAM.  ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE
IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT.  IN
ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO
HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF
FINANCIAL RISK IN ACTUAL TRADING.  FOR EXAMPLE, THE ABILITY TO WITHSTAND
LOSSES OR ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING
LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL
TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE
MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING
PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF
HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT
ACTUAL TRADING RESULTS.  RESULTS NOT ADJUSTED FOR COMMISSION AND
SLIPPAGE.

Last Updated on Monday, 18 September 2017 08:08