Buying The Steepener For A Trade

Just one more post about yield curves – I promise! With Friday’s release of the CFTC commitment of traders report, I couldn’t resist.

In the coming years, I believe the yield curve steepener has the potential to be one of the all-time great trades. Eventually, I think the Fed, along with all the other developed countries’ Central Banks, will lose control of the long end, and yield curves throughout the world will explode to record wides.

As I discussed previously, I am not sure about the long-term timing. Will the Fed invert the curve? Or does the new post-GFC environment throw all those old playbooks out the window?

I am still trying to decide about my long-term positioning, but I am increasingly confident, from a short-term trading perspective, the 5-30 steepener trade is a screaming buy.

Why do I feel so strongly?

Let’s start with the speculative positioning within the US Treasury futures complex.

Speculators are now record short five-year treasury note futures!

But the really interesting part?

They are long 30-year bond futures.

And they are even long the 10-year note futures.

So it’s obvious the spec community has the 5-30 year flattener (or 5-10) on in size.

Easy to see why. It’s been a one-way ticket.

I don’t know if this is the ultimate bottom in the 5-30 year spread, but at least for a trade, it’s a great bet down here.

Anytime the hedge fund crowd of wise guys become this sure of any trade, it’s time to write a ticket fading them. Remember, the new reality is that the market is nothing more than a Series of Rolling Mini-Bubbles. Flattener trades are by no means immune to this phenomenon.

And the real kicker? The steepener is a positive carry trade. The always enlightening hedge fund manager Mark Dow recently had a great exchange on twitter about the carry on the 5-30 steepener trade (click here if you want to be taken to the twitter thread).