U.S. 10-Year Note to Rise on Butterfly’s Wings: Chart of the Day

The selloff that has seen Treasury 10-year notes underperform five- and 30-year debt by the most in three years amid bets the Federal Reserve will slow bond buying is poised to reverse.

The CHART OF THE DAY shows that the butterfly index spread, which measures how the 10-year note is performing against the two other securities, was at 30 basis points, or 0.30 percentage point, after closing at 34 basis points on Dec. 5, the cheapest level since December 2010. A positive reading indicates the market is bearish on the middle security, while a drop into negative figures indicates investors are more bullish.

“The underperformance of the 10-year note seems overdone,” said Michael Cloherty, head of U.S. interest-rate strategy in New York at Royal Bank of Canada’s RBC Capital Markets unit, one of 21 primary dealers that trade directly with the Fed. “We don’t think the Fed’s improved guidance has fundamentally changed the shape of the yield curve.”

The Fed will start cutting its $85 billion in monthly bond buying at its Dec. 17-18 meeting, according to 34 percent of economists surveyed by Bloomberg Dec. 6, a jump from 17 percent last month.

The benchmark 10-year note yield fell four basis points, or 0.04 percentage point, to 2.80 percent at 9:42 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 2.75 percent note due in November 2023 rose 10/32, or $3.13 per $1,000 face amount, to 99 17/32. The five-year note yielded 1.46 percent and the 30-year bond yielded 3.83 percent.

Treasury 10-year debt has lost 6.8 percent this year, compared with the 2.8 percent drop in the broader Treasury market, according to Merrill Lynch Bank of America Indexes.

The butterfly-index spread is calculated by replicating a trade that involves the sale of the five- and 30-year securities, which represent the chart pattern’s wings; buying double the amount of 10-year notes, as the body; and multiplying by 100.

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