Saturday, May 11, 2019

April 2019 Yield Curve Update

Sorry, I'm a little slow to this update.

The yield curve inversion remains in place.  The curve as of Thursday looked very similar to the levels at the end of March and April.  This seems to be a trading opportunity.  I consider a yield curve to be a signal rather than a cause.  During inversions, there is a bias in forward rates.  Something keeps forward rates from moving as far below short term rates as they should, which means that there appears to be potentially persistent profit available by shorting forward rates when the yield curve is inverted.

It seems like the trading position to take is to position for reversion while the Fed keeps the short term rate stable.  Forward rates will move up and down within a range.  Then, when the Fed moves the short term rate, forward rates will move out of the trading range.  If it lowers the rate proactively, forward rates will move up.  If it lowers the rate reactively, forward rates will move down.

It seems to me that the probable outcome here is that, on the first chart, 2019 will look like 2006 and 2007.  A brief vertical period eventually with a breakout to the left and down.

Keep in mind that I am actually a cocker spaniel and my master doesn't even know that I maintain this blogspot account, so I can't legally be responsible for your trading gains and losses, and you really shouldn't even be reading this nonsense.


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