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More Interest Rate Artifacts

In a follow up to our look at 10 year treasuries versus 5 year treasuries, we should look at the longer maturities as well.  It turns out that since the end of August, the 30 year treasury rate has significantly broken away from its downward trend while the 10 year treasury is bouncing between 2.5% and 2.75%.

Disconnect?

This divergence in rate paths between the 30 year and the 10 year mean that the curve is steepening.  In historical context it is a massive steepening:

Can you say "steepest in 30 years"

What else makes this historic steepness interesting is just how low yields are in general.  The absolute spread between the 30 year and 10 year is 1.5%, but that’s over 50% of the 10 year rate.  Visually:

That puts it in perspective

Nice and pretty pictures, but what does it mean?  The 30 year treasury is not being purchased which is making supply overwhelm demand which means that investors do not want to lock in rates for 30 years that are comparable to the rates that they are locking in for 10 years.  This means that there is an expectation for rising rates that is rather strongly viewed by the market, but at the same time the shorter term rates have remained stable because anything is better than sitting in cash…

You could bet that this spread would collapse by buying 30 year treasury futures and selling 10 year treasury futures on a duration neutral basis.

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  1. SDW says

    Weekly TLT chart shows 12 consecutive poor weekly closes on twice normal volume starting in August = heavy supply. Very striking chart.



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