We all know the Fed has short-term rates pinned to the floor. So I’m not saying we’ll see rates surge higher anytime soon. And I don’t expect the FOMC will raise rates at its meeting next week.
But even a minor adjustment higher in rates should make prices retreat enough for a trade. I think we could see 30-yr bond prices fall back near 144’00 in the coming weeks. June futures are breaking their 9-day MA (light blue line) as I write and stochastics are starting to roll over.
A toppy 30-yr Treasury echoes the “risk on” theme I wrote on yesterday. Capital flows go into risk assets – commodities and equities – and out of the perceived safe haven of Treasuries when the market is confident. It appears this is where we are now.
There are several ways to construct a bearish Treasury trade. I would be willing to have bearish exposure in both the long and short ends of the curve.
- Short June 30-yr bond futures and sell out-of-the-money puts 1:1.
- Short one (1) 30-yr bond and buy one (1) 10-yr note futures; NOB spread.
- Back Ratio Spread – Sell one (1) June 30-yr bond 147’00 put and buy four (4) June 30-yr bond 145’00 puts. The cost of this spread should be between $775 and $800. The idea is catch a 2-point move and liquidate sometime in the next two weeks. Do not hold until expiration unless prices collapse.
- Sell short long-dated Eurodollar futures (2015 and 2016 contracts).
As always, I’m here to discuss specifics and give guidance. Give me a call…
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