Anyone looking for evidence that the “reflation” meme was dead or, more recently, that the market perhaps has more faith in the Fed than they do in congress, need only look at the curve.
Indeed it was just last week when the 5s30s was grabbing headlines after flattening through 91.6bp for the first time since December 2007.
That, despite some favorable seasonality as noted earlier this month by Kevin Muir, the Macro Tourist:
Now, some folks are betting that this trend is about to come to an end. Here’s Bloomberg:
The outperformance of longer-maturity debt has been a dominant theme in the market for months. Now, open interest data show investors are unwinding wagers that the slope of the yield curve from five to 30 years will fall, after it turned the flattest in nearly a decade.
In one case, a trader executed large block trades in 10-year and ultra-long futures. The combination created a bet on curve steepening that gains or loses $4.2 million for each basis point move in the yield spread. It’s already up more than $10 million, extending gains after Treasury’s $28 billion seven-year auction drew a yield that was below indications from before the sale.
How is this likely to pan out? Well, this is yet another bet on the viability of the Trump agenda and, more specifically, on tax reform. “Selling blocks have weighed on long duration Treasury notes as traders adjust expectations for a tax overhaul,” John Herrmann, director of U.S. rate strategy at MUFG Securities Americas, said in a client note out today.
So far, so good as the 10Y yield broke back through its 200-day moving average for the first time since August today:
Time will tell.