The Steady Trader

One of my brokers just alerted me that the spread between 2yr and 30yr treasury bonds are at an all time high of close to 400 basis points.  

That led me to look at the spread between 2yr and 10yr bonds: around 280 bps…also very wide.  

Two Questions;

What does this mean and how could we potentially profit from it?

In general a steep yield curve would imply that investors fear higher inflation, which given the printing press action of central banks around the world is a feasible concern.  

The other possibility of course is that investors are entirely wrong-footed with their inflation concerns and we'll soon see a collapse of these wide spreads in treasury paper yields.

This morning we have the all-mighty non-farm payrolls number hitting the tape at 8:30AM Eastern and people will be watching it very closely as usual.  

A pair of eyes very close to the interest rate market last night confirmed my suspicion that people are nervous about today's economic numbers and have been hedging their interest rate exposure.

Now a little more technical.  

Look at the chart below of the 30yr U.S. Treasury Bond Futures contract.  Note the sideways motion in the past two months…and we're currently just at (or below, depending on how closely you're looking) the bottom-end of the trading range.  

Today's economic number could push the 30yr in either direction and out of the trading channel.  My eyes will look at this chart much more closely should we break below current levels and work towards the 112 area.  

Why?  

We've had an almost 30year bond bull market and the trendline that has been in place since then currently sits around 112.  Should we break that level we might be able to start shorting bonds with more conviction and with a longer time-frame (bucket 3)

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