U.S Treasuries Might Finally Be Ready to Stage a Breakaway

  • Rate-option skews have flattened, indicating bull-bear battle
  • Triggers include Trump’s address to Congress, Yellen’s speech

U.S. Treasury yields may break out of a two-month holding pattern as the tug-of-war between bulls and bears is decisively settled by President Donald Trump’s speech to Congress next week and a slew of upcoming data.

The skew between payers and receivers on 10-year yields has dropped to zero from about eight basis points seen a week after Trump’s election, suggesting increased demand to protect short bond positions.

The skew may diverge from zero following Trump’s address to Congress on Feb. 28, where he may unveil details of his tax reforms, and a string of key data releases, including inflation and the U.S. employment report.

Steeper skews would indicate payers richening relative to receivers, signaling expectations for higher rates.

The holding pattern is highlighted by yields being trapped between 2.30 percent and 2.50 percent. Any breakout to the upside could seek the Dec. 15 high of 2.64 percent, while a drop through 2.30 percent could lead to a deeper decline.

  • NOTE: Tanvir Sandhu is an interest-rate and derivatives strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.
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