This segment examines the “TUT” spread which is the spread between the yield of 10 year US government notes and two year US government notes and the correlation of that spread to gold. Pete Mulmat will have you thinking about futures and options on futures in a completely new way.
The spread between 10 year and two year yields is one of the most followed interest rate spreads. Professionals look at it for a signal of the strength of the economy and it is an important measure of the overall yield curve which generally ranges from 13 weeks to 30 years. Pete provided a back of the envelope rule about strong versus weak economies and the shape of the yield curve. The trade is based upon expectations of the curve steepening or flattening.
The spread of 10 years minus two years coming into today was 135 basis points (2.025 ten years minus 0.90 two years). That’s historically low. A five year graph was displayed of the 10 year notes minus the 2 year notes (TUT Spread) in yield terms. A second graph of the 10 year notes separately, the 2 year notes separately and the TUT spread in yield terms was displayed. A third graph showed the percentage change over the last year between the 2 year note rate, 10 year note rate and 10 year note minus the 2 year note rate (TUT Spread).
A calculation of the spread ratio for a 2-10 year note was displayed. Pete explained why we need a ratio and how to calculate it for a steepening play. He also provided an example. A breakdown of his possible trade was displayed. The breakdown included buy/sell, contract month, futures product, current price margin required and total buying power reduction (BPR).
Pete then introduced gold into the equation. He discussed the fundamental relationship and how the price of gold relates to the TUT spread. A final graph was displayed of the yield spread versus the price of Gold Futures from May 2014 to present. Pete also laid out his trade idea which included shorting an option on gold futures and explained his rationale.
Watch this segment of “Closing the Gap-Futures Edition” with Tom Sosnoff, Tony Battista and Pete Mulmat to learn Pete’s trade idea and to learn more about the yield curve and the TUT spread and the correlation of the spread to gold.
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