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“Tut is the spread between the ten year into your notes. Traders sometimes keep an an eye on it as a signal as a signal of where interest rates are well. I assume that that signal at this point. Means.
When interest rates could as flat as possible you re looking at that. But at some point you have to look at that as almost you know if they get too flat right you can look at past the point of where it s in the indicator. Showing you stress or heading lower. Oh.
You know we we you know 708. This spread actually went to zero so we re down in six months from 163 to 81 basis points. So that steepness of that spread has flattened now during the financial crisis. It was actually at zero when you say zero though you there was no difference between the two of the debts.
There s no difference. But that changed if i remember correctly and you can you can obviously correct me if i m wrong. But i remember really treated two years. But i remember that move and i want to say that it was an absolute v.
Bottom. Meaning. That it was it was it was short lived to the extent of maybe like three three days to a week right and it was that exhaustive stress playing through this is yeah. I mean it was your eye.
If you re talking about the end of 2008 because it wasn t it wasn t an eight thousand nine no and it didn t necessarily it started to compress like it did now 807. Yeah. It really during the heart of that stress within the financial system. When we saw hundreds ability to share as a citibank trading at 99 cents right.
This is when we saw this compression to zero got it perfect. So what do we have here so. If this again goes back. And shows.
The perspective of where this spread has traded recently and in the last 15 years again. Oh 708 we traded down to actually just a little bit under. 0. Where the twos were actually a little bit higher in terms of yield.
Yeah. Then the the intense recently with the again. We ve we ve spoken. I shouldn t say we.
But the the fed. The economist s have all talked about this eventual almost inevitable rise in interest rates. This is indicating that those expectations have been marked out very quickly. Maybe you know maybe a little too quickly.
So we could look at this this is number of what this is a pretty dramatic extreme moving from two and a half percent or roughly two percent last year to 80 basis points this year. Wow in that that does seem like a huge move in also but if you look at those other two years when this happened and i said. I said only ten times the last 25 years in this case. It s been 10 times less.
It s been 2 times the last 15 years right. But when you look at both those. Times that you re talking about the thecom meltdown. In in oh.
1. In. 2000. 2001.
And the the housing bubble. And basically the market implosion in the a thousand eighty two thousand nine..
So you re talking about some very difficult times for the market where there was this huge flight to quality were record highs in the equity markets right now absolutely and if this is this is an interesting disconnect this is telling this is telling us. Some different point right right. This is telling us a different story than what equities are telling us. But when you look at equities right now too you can argue that they ve become a safe haven yield.
Play listen there s no question about it because because right now you have dollars. Chasing chasing anywhere that will take them because you can t because at negative yields you can t even find a place to put the money so you buy anything isn t that doesn t that scare. The living crap out of you does to me absolute okay. Since yields and bonds have an inverse relationship the spread is more commonly displayed as zn z t zt obviously being the two year right so this is another way on the platform charting.
The yield is very sure it s more challenging. This is just really. This is the inverse way to look at it is this the lowest that they ve been so far. This is the lowest that they ve been so far in this cycle.
Yes in this 81 basis points. Okay. In since 2008 2008. Yes okay so that s so listen.
This is a really good discussion. Half today. Because you know one of the things that we do here tastytrade is we point out things that haven t you know this has happened three times in the last 16 years. This is a third time right and it s not know what that means.
But no neither do i. But the idea that this write up in equities and this movement. In this part of the curve is a true disconnect. So this walks us through a little bit.
The idea of what we talked about flattening of the curve. The difference between the tenths in the two years. We would sell the spread so we would we would actually sell the two year by the ten year short the front month by the back month. And when we say back month here we re talking about not like a july august calendar.
Spread and crew this is basically a duration the difference between the two year duration. The ten year duration. Steep names just the opposite of that just so we have a common convention. And like all the other commodities we look at where we do calendars trades whatever you do up front and up front meaning here the shorter duration is what you re doing in the spread got it like it just so we understand there soon the two contracts for zt.
The two years en. The 10 year note. The big date prints. The takeaway here is the obvious.
One is the difference in maturity. There is two years in ten. Years but the two year note is twice the notional it s 200000 notional versus a hundred thousand we know fives. Tens 30s are all based on 100000 on equalize them so it does when you when you look at the dollar value of basis point.
Which we ve talked about a number of times. A one basis point sure movement in yield. It s about 36 dollars in the two year. It s about 78 in the ten year.
But since the two year is twice as much as the tenure. It makes it a very clean one to one trade so perfect. But how much is how much does it move a day average number of ticks. You know we you know what we ve got a great the research team never stops making wonderful stuff.
And we have a great visual representation of what that looks like over a ten day period. So the trade setup is pretty simple if you re looking for that 80 basis points to expand back out you would sell you would buy the spread. So you would buy the two years sell the ten years again. These prices are probably closer than they were a half hour ago.
One 3315 in the ten one thirty three twenty through in the ten. That s z zn zn is 13322 okay so a little bit higher..
So we would sell a single note by a single two year you don t to have a single trade you can make it to this or if doomed separately. We have to do them separately. There is a single trade to be done yeah. There s a single trade to be done in this.
There s a single trade to be done in the knobs right and three two one they re quoted in a very funny way they re quoted in net change for the day plus two plus three minus one it s an odd convention. Very few platforms actually list that not spread that touch thread right what s great though is if you do trade those you can t break the legs. So you do get that buying power reduction that margin relief. We re here we re paying where we know that there is a relationship between these we re still paying a short note position along two year position in terms of buying power reduction.
So if you do it as a spread if you were able to would show up as a different symbol. It would show up as a different symbol and you would have for this a traditional model tees for that reason they just make it simple for this touch spread would be bet. 325 and buy a power. Yeah.
It doesn t make any sense. They can t just make a damn simple the relationship looks the same between the two they re both up about seven ticks. So the numbers were to be about the same right so it s and it was interesting when we were trading well. If you ve got a rally.
This morning in bonds you should. This spread should theoretically be a little bit better maybe. It s a tickler ligo. Maybe a tick right a vis 82.
Maybe. It s 80 years that s right that s except. It s about a ticket. We moved out to 84 when we were on the lows.
It s right back to that 80 81 level right now so despite the different notional values of z. And z t. Because that the two to one two thousand one hundred thousand and the devio ones being half the two years as the ten. We do this is the one to one and if you take a look at best practices.
The dv o. 1. Dv of what we did there s a great segment in the archives. It talks about what is dv o.
1. How do we figure it how do we use it it is the tool we use to create delta neutral expressions of trades in the yield curve is the z zn is more popular than zt isn t it volumize volume wise. Yeah. They zn traits about a million to a day.
The two years trade a little bit less okay. But remember the two years while they re trading less it s twice the size of products. So when you look at a volume. There still there s not a lot of movement.
Together both like a half a tick wide this they re both the tick white actually the 2 year trades in quarter ticking currents. Nice where the but the notes trade in half take increments done so both fifteen sixty two dollars and fifteen dollars sixty two and a half cent increments and this is just this is a tremendous visual. These guys put together and they ve done it for every product. So the straight znz t for context.
This is showed how much the spread has moved over a 10 day period. And one of the questions i get and i m sure you guys too is you know you re trading. These futures what should i expect what is a range. What is an expectation for a move and with the movement.
We ve seen the general softening flattening of the yield curve. We ve seen that this expectation of the move has moved out relatively dramatically. Now remember this isn t over a single day period. This is over a ten day period.
Yeah so it s a little bit bigger. But we ve seeing that the spread can have a significant move at these levels as well just from the graph up there as well as wise..
It s been since late february march. Right okay. I m liking this i mean i m just like in the world. We are level wise.
I don t know why it what else i like about it all right so this is you re putting theta in here. If you want to put a little theta in there and if you want to get smaller. I mean you know starting out in a yield. Curve trade is ct and zan our bigger products.
They re going to they re going to move more as we saw from that visual. You want to get comfortable you want to add a theta component. You can get really small here you can see by the deltas how small we ve gotten you can basically buy a call spread in ct you can sell call spread in zn and for again getting that exposure. The the reason.
We ve waited the deltas you would think the deltas would be closer to one to one. But when we look at notional iv not iv rank. Which is running around 50 percent. But notional iv.
It s plus. The one percent in the two year it s about six percent in the ten year. So that s why we have a little bit more 10 year to year delta that we do long two year delta that we do short tenure. Delta.
But this is again a great way to take to be engaged you ll start you could start to watch. And this is that something that is going to be quite as painful for you it s funny you know the the 30 years up today. But the tenure in that the tenure and the two years are both down yeah. So it s not like it that s why hasn t widened whatever okay got it yeah the curves are gonna the curve is compressing again compressing even more you ve got a price of 6 and 13 up there it s more like 6 and 8.
Now so it s coming on that calls but to sell it now this is something that s interesting and if you want to ratchet not ratchet it up. But if you want to look at a interesting component and something that isn t necessarily evident. People mae. And i get a lot of questions.
How do interest rates and gold respond to one another and actually the correlations between bonds and gold s aren t that rich they re well below 50 our point a positive 05. But when you look at the yield curve in gold. It s a little bit different story typically a flattening yield. Curve tends to be bullish for gold flatter.
Yield. Curve economic weak this safe haven assets. Like gold become more valuable. They re also goldson on baring non interest bearing assets.
So it is less attractive in a high interest rate environment. It is more attractive in a low interest of all other things being equal gold has spent the last few months climbing against the declining yield spread. This is what we ve seen the compression in the yield spread the railing gold meaning. It s possible they have some short delta and gold.
If you d like to look at something that again is if you believe that this is that a bit of an extreme. This is another way to add a correlated component to this for here straight. Yeah gold actually just rallied. It was down like 17 on the when the number k.
Now it s up to was just crazy tony while you got it talking pete i couldn t resist selling some bonds up you know from in the 20s 22. I think in 20 25. 22. An average around 17 am buying some back now at 14 and 15.
If we get them back. But that s just a stupid little scalp just because i think that you know that s where the opportunity is it looks like it i m gonna put this. I m gonna put this yield curve on this this touch spread on i haven t done it yet. Where which one do you do first you do the notes first you know what you can what s great about both these is they re one tick.
Why d they were as killed. The notes..
They were trading up over well 134 another down well people s looking at this. A 13 cent. Creditors looking at this is an 8 debit. So we re actually come in a little bit better because you ll be buying it at 6 and selling at 13.
Just assuming that you can get filled at those prices right and you know what you could do the i tend to pick the longer duration. Because it has little bit more movement to it there s a little bit higher beta. So i would do the ten year portion and know that you can get the two year. If you look at the two years they re very thick in terms of bid and ask and they are a a one one twenty eighth of a a point wide and you re pricing that you had up on the screen.
A moment ago. You were selling the ten year right at 15 1. 33. 15.
And you were buying the 2 here at 109 12. I m trying to figure out the prices right now. It s a little more confusing than you you know it s well are you seeing 109. What it what s on the screen right now for the two year because it trades in those quarter.
Point increments. So it would be 109. Oh. Or 109.
Oh. Five. Those are the quarter point increments for it s really 18 right so that s 18 and a quarter points. Got you i m gonna like it here.
So and yes. And you know what time you make a great point. This is not something you set up as a blast. All you you can i have it here as a blast hole just so everybody could see it up on the screen right.
But for the options. It might be a different sort. But for the futures you can you can definitely work an offer and especially in the two years work a bed excuse me work an offer in the two year. No work a bed in the two years working off or in the ten years and that can work very well for you that s correct so we just got filled in the bonds.
I thought we were getting filled in the notes. No he s so confusing. 14. Or founds at 14 perfect okay.
It s a total of about 50. Yeah. That s 50 okay so we ll take that scalp rather have the scalp it so you re talking 10 ticks out of the buns pete that was great. I m gonna put this spread on i m just having trouble the they killed the notes as we were talking yes.
You know the bonds are up so it confused me because the notes actually got hammered. I couldn t couldn t get the notes off. I i thought. I was filled just a second ago 90 at nine and a half and it turns out they re at six now so it was they re all over the place that they are and we ll try to get the spread.
I m good at diamonds. But don t chase right you re absolutely right yeah. This is something that i think if we get in who knows where the bonds are gonna go. But the bonds are definitely pulling the rest of this but you can again see even with the bonds up at 25 and it was a great scalp down to 14.
The the weakness is still in that dick trust. Me oh god yeah. What s up youtube thanks for watching our video. If you liked this video give it a thumbs up click below and watch more videos subscribe to our ” .
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