Market Measures

Negative American Yields | Still Far Off in America

| Jun 22, 2016
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    Market Measures

    Negative American Yields | Still Far Off in America

    Jun 22, 2016

    The U.S. 30-Year Treasury Bonds and 10-Year Treasury Notes have been moving a lot recently along with their respective Futures contracts (/ZB and /ZN). Overall though, the Yield Curve has flattened and moved lower. So what does this mean and is there an easy way to calculate what the yield moves mean in dollar terms? Is there some equivalent of Delta that we can use?

    A normal yield curve shows shorter term products with the lowest yields and longer term ones with the highest. A flattening yield curve usually happens when yields are declining and the long end declines faster than the short end. This is a signal of market uncertainty and has been the scenario we have seen recently. The yields on the 10-Year Note recently hit their lowest level since 2011 and the spread between the 10-Year Note and the 2-year Note was at its smallest levels since 2008.

    There is a perfect inverse correlation between yields and prices so when yields go down prices go up. Bond Futures and the options on those Futures enable most traders to trade Bond prices while the yields put context around the trade. The Best Practices segment from June 13, 2016: DV01: DV of What? recently discussed the DV01. DV01 is very similar to Delta. It is, like Delta, better for calculating smaller moves. Delta is less efficient for calculating larger moves in a stock because of Gamma.

    Where would the Bond contract trade if U.S. Treasuries were yielding around 0% on the 30-year duration? We can use DV01 to get an estimate. The current DV01 is $236.20. We can use this to estimate how far Bond futures will move along with changes in market yield. The idea of bonds trading at 226”11 probably seems wildly unrealistic to you. You could sell Vertical Call Spreads in /ZB to get long yields. The TYVIX measures the volatility of the 10-Year Treasuries. Implied Volatility (IV) has been dropping in many stocks but the Treasuries have seen increases in their IV and have been one of the few places to Short Premium.

    Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the key takesaways and a better understanding of forces driving Bond yields and how to approximate possible moves in yield in dollar terms.

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