Five-year Treasuries are leading the way in the flattening of the 5-30 Treasury Yield spread and will continue to do so as methodical tapering leaves trader’s thoughts to more exciting policy lift-off dates. We see the five-year Treasury as having less than half of its remaining life in the land of zero interest rate policy (ZIRP). If some of the more aggressive calls for mid-’15 policy lift-off date are correct, as much as 70% of the current five-year will lay beyond the ZIRP. For guide, at some point over the next nine months, it is extremely likely that some news concerning inflation will put at peril expectations for protracted ZIRP.
Right now, the 5-30 spread is lower by 4 bps to 206 bps wide. This yield curve is fast making its initial objective of 190 bps.
Consider again the FVH4 (March Five Year Treasury) 118 put. It has 30 days of life and a delta of 11. It is quoted 4 / 4.5 referenced futures at 119-18.25 / 18.5. It will double with a move to 118-28 within seven days.