US Equity Indexes were rather directionless for most of the day as the market weighs continuing corporate earnings reports (including Amazon, which reported record earnings but also that its CEO and founder, Jeff Bezos is stepping down), a better than expected employment report from ADP, declining COVID-19 cases and the ongoing negotiations for additional COVID-19 stimulus. Implied volatility in the equity index options markets at CME Group declined again today.
The price of WTI Crude Oil futures rallied another nearly 2% and is now trading at a higher level than it was prior to the global economic shutdown caused by the COVID-19 pandemic last year. Implied volatility in WTI Crude Oil options is trading near the lower end of the 6-month range and the 25 Delta strike Puts are trading about 5% over the Calls.
US Treasury futures prices declined at the longer end of the yield curve and that has led to the highest implied yields in CME Group longer dated Treasury futures that we’ve seen since last March. The image below is an excerpt from CME Group’s Treasury Analytics tool and shows the implied yield of the 2-Year, Ultra 10-Year and Ultra-Bond futures contracts (we chose the “Ultra” contracts as they are the closest proxy to the on the run cash treasuries for those maturities). As you can see, the 2-Year yield has remained fairly constant since March of last year while the Ultra-10 Year and Ultra-Bond have seen a significant rise in yield. While the US Federal Reserve has pledged to keep short-term interest rates low, the longer end of the yield curve is more sensitive to macro-economic factors such as inflation expectations. Rather than directional positions on one point in the yield curve, many interest rate traders will assume spread positions based on the shape of the yield curve or, in other words, the yield of one maturity versus the yield of another.
For example, according to the same graph pictured below the difference between the implied yield on the 2-Year and Ultra 10-Year on April 2nd of last year was about 42 basis points and the difference between the 2-Year and the Ultra-Bond was about 102 basis points. Today, the differences are about 103 basis points and 176 basis points, respectively. Therefore, a trader who assumed a short position in the longer dated treasury (remember price and yield move inversely) and long position in the shorter dated treasury last April, would have profited from this “steepening” of the yield curve. CME Group’s Treasury Watch page, linked here, provides comprehensive information on CME Group’s suite of interest rate products.