A great trading opportunity could arise
24 March 2022
I take stock of the situation in Forex
10 April 2022
About ten days ago, I wrote an article with my own analysis of a spread that I called "A great trading opportunity". What I considered probable in that analysis has indeed materialised: the 2-year Treasury yield is now higher than the 10-year Treasury yield. In the past, this signal has always preceded a recession. You can see it in the chart below.
This situation is not common; it has happened on only seven occasions since 1976 (in 46 years). From the graph you can immediately see that such an event has always anticipated a more or less long period of recession. This does not mean that the markets will collapse tomorrow. On the contrary, it is very likely that US equities will continue to rise, driven by those funds that have an interest in selling the equities in their portfolios without causing shocks, helped by the small traders.
But now the Federal Reserve, which has planned a slew of rate hikes, will find itself in the uncomfortable position of having to choose between continuing to raise rates unnecessarily (plunging the US economy into a more dangerous downward spin), or revising its monetary policy, at least in part.
For the little that I know of Jerome Powell, I have no doubt that he will remain strongly committed to continuing with rate hikes. I would not be surprised to read that the inversion of the US yield curve is something transitory (along the lines of the September declaration on inflation).
I remain convinced with what I wrote in my previous article, with what I analysed even though, regarding that analysis I am more inclined to move from the spread GEH23-GEH25 to that GEH25-GEH27. This certainly offers me a greater time window (about three years) to manage the whole operation (and without being in a hurry for events).
From the chart above, you can see that the spread is at a very low level. Since the last analysis, it has fallen substantially to a lower value (-0.400) than the GEH23-GEH25 spread (-0.365).
I want to show you something that will make you understand the potential of the spread. The last three times the 2-year Treasury yield has been higher than the 10-year Treasury yield were in 2000, 2006 and 2019. I have taken the same type of spread (i.e., built with maturities of the same distance as the current one) and highlighted the movement since the beginning of April. Below you can see the three charts.
Aspect not to be underestimated, in all three previous situations the spread never went negative. If I was convinced before that buying the spread will bring excellent returns, I am now certain of it; in my opinion it is the best trade you can open in 2022. I do not think the spread will go down much more, but you have to consider that one point of the spread corresponds to $2,500. So even a couple of tenths of a contrary movement would cause you to lose $500 momentarily. So, make your own assessments based on your money management.
The 2-year Treasury yield is now higher than the 10-year Treasury yield. This situation is not common; it has happened on only seven occasions since 1976 (in 46 years) and has always preceded a recession
3 Comments
thnx David
never was traiding it – so it’s first spread in my life
it’d be wonderfull if you could attend this pose
like I understood it would be last a couple of years
I took a tiny position just to try , but I’m ready to grow it
Yes, being personally interested, I will follow the evolution of the trade with updates when there is news
my small position yet generate a decent profit and I regret that it’s so small