tactics essential trading strategies
INTERMEDIATE
Betting on the Fed
Incorporating spread trades into a portfolio can open a whole world of opportunity
By Michael Gough
T
he once-sleepy interest rate environment is starting to awaken after a recent Federal Open Market Committee meeting. Following the Fed’s announcement at that gathering, U.S. 2-Year Treasury Yields jumped from 0.15% to 0.25% in a matter of days and then remained over 100% for weeks. While the 2-Year yields have responded swiftly to the Fed’s decision, the opportunity extends beyond short-duration Treasuries with the whole yield curve shifting. The U.S. Treasury market may be one of the largest and most actively traded markets in the world, but interest rates are still a nascent asset class for many DIY investors and traders. This is probably because of the market’s inherent legacy complexities. While interest rates are quoted everywhere, trading products— such as the iShares 20+ Year Treasury Bond Exchange-Traded Fund (TLT) and CME Group 30-year Treasury Bond futures (/ZB)—are quoted in terms of price, which moves inversely to yields. Few traders, if any, can convert a Treasury bond price of 160 into an interest rate without a calculator (the corre-
Look to the past The price history of interest rates generates ideas for investors, speculators and hedgers. 7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
Jan 2000
Jan 2004
Jan 2008
Jan 2012
Jan 2016
Jan 2020 dxFeed Index Services
sponding rate is 2.1%). The Small Exchange offers an opportunity to engage in this market with a suite of treasury interest rate products quoted in yield. Small two-year, 10-year and 30-year interest rate futures remove the complexity of converting prices to yields. So, traders can execute on
Bullish (Bearish) on 10-year yields? Buy (Sell) /S10Y futures.
August/September 2021 | Luckbox
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