Special Market Report: FOMC Prep – Bond Yield as FED Tool (George Cavaligos)

George Cavaligos from the floor of the CME Group. I'm a broker with MF Global here in Chicago. Been on the trading floor for about thirty years. Fari Hamzei's been kind enough to allow me to show you our trading floor and a little bit of our color from the bonds and notes here that we trade on the trading floor. Thirty and ten year notes are our strong point. That's where we've seen a lot of activity over the last couple years as the Fed has pushed its zero interest rate policy. The short end of the Treasury curve goes out from zero to about two years what we call the intermediate sectors five years the seven years, then the long end is tens and thirties. We're going to talk about tens and thirties today because we're coming into the Fed meeting. Today is Tuesday, the meeting started today. The Fed announcement will be tomorrow afternoon about one fifteen Chicago time. Most of us think the Fed is going to try and come out with a new program to try and backstop the economy here and keep rates lo. We're going to look at a specific sector of the curve. First off a little history lesson. If we look back at the financial crisis in 2008, we look at the end of the year we see that most of the Treasury curve from zero to ten made very low yields back then. Since 2008 bills perked up and now since early 2011 we've seen those rates go back down again as the economy has showed more weakness and the turmoil in Europe has caused this flight to quality. Where a flight to safety where people come and buy bonds and notes and Treasuries of any maturity to park their cash and safe place. There's a little bit of an anomaly here where are the thirty year bond has not made new lows this time down. If you look at the thirty year chart see that the low in 2008 was 2.52%. Thirty year bonds which are around the recent low yields are only trading at 3.22% right now so we're about seventy basis point, or seven tenths of a percent above those old Treasury yield lows in the thirty year.

I think the Fed sees this and that's what they're looking at as a sort of a layup but an easier place to try and maintain some type of stimulus in the economy by bringing down thirty year yields. There's talk and most people in the financial markets are looking for the Fed to come with what they call an "operation twists" program where they will either buy thirty year notes and/or sell short term notes to keep their maturity, or to move their maturity is a little bit longer term duration. I think they'll probably come with some type of program more than they'll going to push the thirty year yields down and it's an easy trade for them. It'll tend to backstop the economy. I don't think it's a be all end all response to the financial crisis that we're still going through. We need a little help from Congress in the administration, specifically in the housing market which is what most people in the consumer side are struggling with at this point.

We'll take a look at a couple trades. The treasury yield curve. There's a couple of opportunities here that we've looked at whether we're gonna be selling 2 years of buying 10 years as a nice opportunity. It's currently trading around one eighty if you look at the yield difference between those two sectors of the curve. Long term that trade, it's already flatten quite a bit. The highs were made back in February at two hundred ninety basis points but historically we think that can go down more. We think over time here that should work its way down towards seventeen to ninety basis points if you follow historical trends. Also the NOBS spread, what we like to trade is between the 10 yr note and the 30 yr note. That is that at any kind of extreme levels here but we think that might be a spot where there's an opportunity that hasn't been seeing alot of flattening yet. We've already seen some tremendous flattening: 2's, 10's, five year. We have not seen a tremendous amount of flattening in the 10's 30's spread. We think maybe if you take a look at the NOBS spread, which is the notes over the bonds, selling ten notes buying bonds on a ratio basis will keep in the futures market will keep the yield differentials the same might be a great trader take a look at. thank you very much free time try to keep up with the markets through Fari's great website (HamzeiAnalytics.com) here guys have a great day.

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