Yield Curve Steeper Netflix on Tap

Ok guys we just wanted to touch base here real quick, as we noted earlier this week, we were looking for the U.S. yield curve to move steeper. Yesterday the 5s30 which measures the differential in basis points (1bp = .01%) between the yield of the 5yr note and the 30yr treasury bond. In the futures markets we call this the FOB, but in the cash market its just 5s30. Here is the daily chart with the spread in purple:

When we zoom out on the weekly chart, you can see how steep this spread was prior, trading over 300bp in 2011 and 150bp more recently in May of 2021:

The massive steepening post GFC was unwound from that 300bp level via a program called “Operation Twist.” During this time, the Federal Reserve decided to sell shorter-term Treasury securities, which in turn increased the supply and put upward pressure on their yields. They then simultaneously, purchased longer-term Treasury securities, which increased demand for these securities, pushed up their prices and, consequently, put downward pressure on their yields.

The combined effect of these actions was to reduce the spread between short-term and long-term interest rates, making the yield curve less steep or flatter. The goal was to lower long-term borrowing costs for businesses and consumers, thereby stimulating investment and economic activity, while avoiding further reductions in already near-zero short-term rates.

As a bond arb during this time, we would front run these purchases which were well known and outlined, thus adding to the effectiveness of such telegraphed monetary policy movements.

What it seems like to us is that the Federal Reserve want’s the curve to become much steeper and will effectively accomplish this on their next rate cut cycle. The fact that they are not rushing to cut rates, is a good thing, honestly we don’t see the need to change the policy at this point. We feel that the market is adjusting to the new higher equilibrium rate and its within this mental and coherent acceptance of this environment of higher rates, that businesses and consumers are forced to rethink their spending habits.

With the tariff card still in Trump’s pocket, we believe the FOMC is making the right call here and being patient.

Alright, we have Netflix earnings after the close:

The at the money straddle is about $80 so a 6.2% move. Ok so let’s see how it goes!

Alright, we have all the subscriber only data up next, we urge you to become a full subscriber and truly break through that barrier of understanding in regards to our global financial system and perhaps implement some of our trading trackers into your own investment profiles! If you are sick of stagnating, sick of losing then join the ranks of MTR Subscribers!