Key Takeaways with Craig
On the second trading day of 2022, US Equities were mixed with the Dow gaining just less than 1%, the S&P 500 near steady and the Nasdaq lower by over 1%. The Nasdaq underperformance was perhaps in part due to the continuing rise in longer term Treasury rates as the Micro 30-Year future was up by about 6.5 basis points and the 10-Year was up by about 4 basis points. During the second half of 2021, the technology-heavy Nasdaq index has been relatively more sensitive to higher interest rates. Somewhat unsurprisingly, we saw implied volatility in the Nasaq-100 options move higher while that in the Dow options was near steady.
Commodity markets were active, and mostly higher, today at CME:
- WTI Crude Oil futures price was up over 1% to over $77 per barrel; the highest prices we’ve seen since late November
- Corn prices were up by nearly 3.5%
- Soybean prices up by about 2.5%
- Wheat prices up by about 1.5%
- Gold up by about .75%
Getting back to the move in the US Treasury yields, we’ve seen a fairly substantial increase in yields since the last week of December. Specifically, according to the Micro Treasury Yield futures prices, the 5-Year is up by about 14.2 basis points since 12/28, and the 10 and 30-Years are up by about 16.5 basis points. However, the 2-Year Yield is up by only 3.2 basis points. This represents what we would describe as a parallel upward shift from 5 Years to 30 Years but a steepening move when looking at the 2 Year versus the other maturities. As we’ve discussed before here in the Key Takeaways section, many professional interest rates traders trade the shape of the yield curve using spreads between the different maturities and not just the direction of interest rates at a certain point on the yield curve.
We put together the simple chart below to depict the changes in Yield in the different Micro Treasury products between 12/28 and today. We also included a hypothetical P&L based on a trade using the $10.00/basis point value represented by the futures contract. We also included the spread differentials to illustrate the steepening of the curve from the 2-Year vs the other maturities and the parallel shift between the 10 and 30 Year maturity points.
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