5/30
May 5, 2020
–Quick note this morning concerns long end of the market. The 30 yr yield is 1.33% this morning, up from 1.295 yesterday. Since late March USM has traded a relatively tight range between 177 and 183 and is now almost in the middle at 179-25 but appears to be weakening. Above is the 5/30 spread which is around 95 this morning (+2). In mid-March this spread hit 110 bps, then subsequently retraced to 80. However, over the longer time-frame, these levels are the highest since late 2017. This spread appears to have put in a decisive bottom in 2018.
–Whether driven by renewed concerns about future inflation, or about massive treasury issuance (Treasury expected to borrow $3 trillion in Q2! ) or perhaps even a slight spill-over this morning from the German Constitutional Court that the ECB must justify bond purchases, the idea that the curve might continue to steepen is good news for banks in terms of positive carry, but perhaps somewhat sobering for the rest of the debt-laden corporate market that faces bankruptcies if bonds can’t be rolled near zero rates. Implied vol has been crushed in treasuries over the past two weeks, but bond vol remains stubbornly bid relative to five-year when compared to contract durations. There is probably a reason for that.
–Might be worth considering some wingy bond put insurance.
