International Yield Curves

Yield curves are slightly more flat than last week as demand for short-term securities across the globe increased. Traders have kept European yields low in the expectation that the ECB would buy bonds.

German yields reached six week highs after speculation that Spain would ask for a bailout as Spanish yields reached relative lows. Last week at this time short duration German bond were trading more negative than this week. For example, last week’s 6-month German yield was .1%, this week the yield is .02%. I will keep my eye out for any developments in Europe with regards to Spanish bailouts.

Opportunity still exists for traders to profit from the front end inverted yield curves of the UK and Australia.

Yield Comparisons

Investors and traders should  their eyes out for front-end inverted yield curves in the UK and Australia. It is curious as of lately there is a short end inversion. This is where the Demand for short duration sovereign bonds in these countries is weaker than 1 month, with strong demand in the short-mid duration bonds. In situations like the ones mentioned above, the economic outlook causes a sharp increase in short duration bond supply is not good in the short term where yields are relatively high. Investors are not willing to hold short term securities with durations leading up to the bottom of the yield curve dip. The demand for German bonds is so high that some of their yields are trading at negative values.

As a trader, I am looking to profit from the front-end yield curve inversions. I would buy the front duration, sell the bottom of the curve X 2 and then buy a further duration, creating a butterfly spread.

Treasury Yields

For the past few years, institutions have been using treasuries as a safe haven from risky assets. The pilgrimage to safety was sparked by droves of funds moving to the “risk free” bond market after cutting losses from the financial market collapse in 2008, and most recently, as a safe haven from European sovereign debt.  Yields of German and Swiss debt remain much closer to zero than U.S. treasuries, however money has been flowing out of more risky assets such as Spain, Ireland, Greece and Portugal.

The Fed is playing with the idea of dropping rates on longer duration treasuries to spark riskier investment practices such as lifting the stock market. As you can see from the 3-D treasury graph over time below, Yields have been flattened towards zero across the board with risk of the longer duration bonds falling more every time that Bernanke opens his mouth.  Stock market bulls are constructing their portfolios to reap the benefits of money flooding out of the treasury market into stocks. This is demonstrated by the outperformance of blue chip stocks.

Although I am bullish on interest rates on the long term, I believe that the Fed will be forced to step in and buy long duration bonds before the economy bounces back to full health.