Riding The Bull Flattener: Top Trade Q1 2022

Heading into subsequent 12 months, tighter financial coverage and a deceleration of financial progress are prone to current a more difficult atmosphere for danger belongings. In fee of change phrases, financial progress as measured by U.S. Y/Y Actual GDP is prone to gradual in opposition to very steep base results, returning to a degree harking back to our pre-COVID economic system.

U.S. Actual GDP Y/Y

Riding The Bull Flattener: Top Trade Q1 2022

Moreover, ought to the sturdy restoration within the labor market proceed, it is usually doubtless provide chain linked inflationary pressures will begin to subside into the primary half of 2022.

U.S. Weekly Jobless Claims 4-Week Common

Riding The Bull Flattener: Top Trade Q1 2022

U.S. Unemployment Price

Riding The Bull Flattener: Top Trade Q1 2022

U.S. Headline CPI Y/Y

Riding The Bull Flattener: Top Trade Q1 2022

Ought to the economic system enter a interval the place each the speed of change of financial progress and inflation inflect to the draw back, coupled with a Federal Reserve embarking on a path in the direction of elevating short-term rates of interest, we may see longer dated treasuries outperform amid an additional flattening of the yield curve and tighter monetary situations.

Stated otherwise, I imagine the Fed will discover itself tightening right into a slowdown, which could possibly be presaged by a bullish flattening of the yield curve. This state of affairs entails falling long-term charges, whereas the quick finish of the rate of interest curve stays anchored to present expectations of three fee hikes in 2022.

The market could also be signaling this commerce is already underway after we take a look at the 2s10s curve. Ought to it decide up momentum, I imagine we may see additional compression in the direction of 0.50%.

U.S. Treasury Yield Curve 2s10s Unfold

Riding The Bull Flattener: Top Trade Q1 2022

This commerce may be expressed via a 2s10s bull flattener the place we’re quick the two 12 months Treasury in opposition to a protracted 10 12 months Treasury on a DVO1 (greenback worth per bp) foundation.

In easier phrases, this will also be expressed via bullish publicity to lengthy dated treasures by way of choices, futures, or Treasury ETF (Trade Traded Fund) reminiscent of TLT.

— Written by Ryan Grace, tastytrade Chief Market Strategist


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