8 Apr 2014
Not easy to profit from a bear market in Treasury rates - BofAML
FXStreet (Bali) - David Woo, FX and Rates Strategist at Bank of America Merrill Lynch, provides some interesting data on the trading conditions surrounding the 10Y Treasury yields.
Key Quotes
"History tells us that it is not easy to profit from a bear market in rates."
"Take the 52 weeks in the run-up to the first rate hike (on June 30, 2004) in the 2004-06 Fed tightening cycle as an example:
During that period, 10y Treasury yields rose 117bp. However, once adjusted for negative carry and roll-down, an investor would have made only about 70bp, assuming a short position in 10y Treasuries was established on June 30, 2003 and held it for the next year."
"Of the 260 trading days in that period, 10y yields went up in only 130 days (these went down in 123 days and were unchanged in seven days). This meant that, on any given day, it was pretty much a coin toss, even though the first Fed hike was approaching."
"The cumulative increase in 10y yields during all the 130 days in which yields rose was 754bp. However, a third of this increase (245bp) happened in the 16 days during which 10y yields went up 10bp or more. This meant that an investor with a short position in 10y Treasuries for 244 days, but not on those critical 16 days with outsized moves, would have lost a lot of money."
"On nonfarm payroll days during those 12 months, 10y yields moved on average by 13bp (including both up and down days), more than twice as much as on normal days. On three of those days, 10y yields moved 20bp or more."
Key Quotes
"History tells us that it is not easy to profit from a bear market in rates."
"Take the 52 weeks in the run-up to the first rate hike (on June 30, 2004) in the 2004-06 Fed tightening cycle as an example:
During that period, 10y Treasury yields rose 117bp. However, once adjusted for negative carry and roll-down, an investor would have made only about 70bp, assuming a short position in 10y Treasuries was established on June 30, 2003 and held it for the next year."
"Of the 260 trading days in that period, 10y yields went up in only 130 days (these went down in 123 days and were unchanged in seven days). This meant that, on any given day, it was pretty much a coin toss, even though the first Fed hike was approaching."
"The cumulative increase in 10y yields during all the 130 days in which yields rose was 754bp. However, a third of this increase (245bp) happened in the 16 days during which 10y yields went up 10bp or more. This meant that an investor with a short position in 10y Treasuries for 244 days, but not on those critical 16 days with outsized moves, would have lost a lot of money."
"On nonfarm payroll days during those 12 months, 10y yields moved on average by 13bp (including both up and down days), more than twice as much as on normal days. On three of those days, 10y yields moved 20bp or more."