FxWirePro: A Run Through on US Treasury and Rates Strategies

How desperate the market currently is for relevant news was illustrated by the reaction to a meeting between the US President Donald Trump, Treasury Secretary Steven Mnuchin and Fed chair Jay Powell yesterday. The decisive headline for the market was that amongst other subjects the three had discussed the dollar strength and its effects on the industry. The US currency immediately eased in reaction to the news, despite the fact that it contained no new information.

The US Treasury curve has bearishly steepened, supported by increased optimism that the US and China are progressing toward signing Phase 1 of a trade deal, and a Fed that believes that the current stance of monetary policy is likely to be appropriate for the medium term. Over the period, 2-, 5-, 10-, and 30-year yields rose 5bp, 10bp, 11bp, and 10bp, respectively.

Though the experience of other insurance easing cycles and modestly long investor positioning suggest risks to higher yields, the Fed’s shift toward average inflation targeting and still-high recession risks limit the scope for rates to reprice: stay neutral on duration. We review the latest round of Fed reinvestment purchases. The fall in implieds has outpaced liquidity improvement, cover 3mx2Y shorts. 

Trade Updates: 

Take profits on short 3Mx2Y ATMF swaption straddles 

Implieds have fallen across tails, outpacing the renormalization in liquidity

conditions, and our fair value model suggests the upper left no longer looks cheap 

Cover short $500mn notional of 3Mx2YATMF straddles (notification date 1/27/20, maturity 1/31/22, ATMF strike @ 1.60%, premium 52.5c). This trade requires frequent delta rebalancing (Fixed Income Markets Weekly 10/25/19). P/L since inception: +3.6abp.

Stay received EUR/USD 3Mx3M OIS/OIS basis 

Receive $50kDV013Mx3M(swapstart:12/09/19,swapend:03/09/20) EUR/USD OIS/OIS basis at -59bp; Fixed Income Markets Weekly; 9/6/19. P/L since inception: -14.4bp. Courtesy: JPM

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