There have been some significant moves in different markets since the election. One of the most significant has been in longer dated Treasuries. Prices for 10-year Notes and 30-year Bonds plummeted and their yields soared, hitting the highest level in a year. The yield on the Notes rose above the dividend yield of the S&P 500 for the first time since last year.
Investors have been placing capital in dividend paying stocks because of the low yields on US Treasuries and the even lower yields from some other countries which have recently experienced negative yields. Utilities and Consumer Staples, which pay solid steady dividends, were some of the main beneficiaries of this capital movement. They have been pressured as yields on Treasuries have climbed. Trump’s election was not expected and the markets are adjusting to expectations that the economy will see a bump up along with inflation. What exactly will happen though is unknown and the markets may have overreacted. The correlation between the yield on Bonds and Notes to the S&P 500 is negative but only slightly. It is much close to zero than -1.0. The recent divergence between these two asset classes though has been extreme (a graph of the /ES and the /ZN demonstrated this).
Pete began the explanation of his two trade ideas by first reviewing some information on the two Futures contracts, /ES and /ZN. Specifically, the table he displayed listed their notional value, 90-day Implied Volatility (IV) and IV adjusted notional value. Pete uses these metrics to construct his Pairs Trade as well as demonstrated how to use options to dramatically lessen the margin and Buying Power Reduction (BPR). Only 1 /ZN was bought and the short /ES was replaced by a short Vertical Call Spread. James, one of our top researchers suggested some alternative ideas depending upon what may already be in a trader’s portfolio.
Watch this segment of Closing the Gap - Futures Edition with Tony Battista, our Futures expert Pete Mulmat and special guest James from the Research Team for all the details of these two trade ideas, James’ and Tony’s response and see how professionals might take advantage of an unusual move in the markets.
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