Keep your eye on this spread

The Treasury 5-30 spread has a 170 handle for the first time since October 2009.
 
In the first 4 sessions following the March FOMC meeting, 10 year Treasuries (CBOT:TYM14) traded within its tightest range in months. There was no extraordinary outcry from Fed officials that the market had totally misread either the ‘dots’ or Yellen’s post-meeting reference to ‘considerable period’. Since that meeting, guidance offered by Fed officials has generally indicated that the message from the March FOMC meeting is consistent with what they have been saying for a while.
 
As a result, there has been no big recovery in Eurodollar or Treasury prices as there had been in mid-’13. Additionally, the longer end has fared better than the belly of the curve. The Treasury 5-30 yield curve flattened 11 bps on the FOMC date and paused only a day before falling another 11 bps. Today the spread is lower by 7 bps and with a 170 handle (179.65 as I write).
 
With the earlier called for 190bp initial objective having been achieved, we might move up the timeframe for expecting the minimum objective of 120bps. With prospects for some stronger data surprises over the coming months, we could see the spread move rather quickly to 150-160. The 120 level is likely to be breached before end of Q1 ’15.
 
The Fed has talked of the ‘glide path’ as likely to be very shallow. In this they mean that the pace at which they are expecting to raise the policy rate will be very slow and steady. We shall listen for clues about the possibility for that expected glide path to change. Over the next months, there will be times when the market will want to price in a more aggressive policy path or steeper glide path.
 
About the Author

Martin McGuire, managing director at TJM Institutional Services

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