Don't freak out over today's Treasury bear market short squeeze

Bear market short squeezes can be brutal. They are not, however, life-threatening to the developing bearish trend. Today’s bullish U.S. fixed income advance happens just shy of a week from the FOMC meeting where expectations have largely centered on ‘maintenance’ in both policy programs and language. As the equity market continued to fall today, erasing as much as 1.4%, fixed income traders wondered if the Fed will signal a change (slowing) in the pace of tapering.

For what it is worth, these are ‘gift’ levels for those who would be willing and able to set into short positions. Back month Eurodollars are higher by as much as 17 bps in the Green ED’s as I write and the 10-year Treasury (CBOT:ZNH14) is 7/8ths of a point higher. The 5-30 Treasury yield curve steepened by 4 bps today to 2.09%, so those looking to enter into a bearish flattening should consider selling the 5-year Treasury here to buy the 30-year or Ultra Bond later.

One-day options are available in Treasuries, but would recommend longer term March expiry for those looking to build a position in Treasuries.  Blue March (2017) Eurodollar Options have 50 days and shorter dated, February have 22 days.

About the Author

Martin McGuire, managing director at TJM Institutional Services