Posted by: jhamon | February 24, 2010

MysteryHedgie: The Yield Curve Flattens…

The flattening from record wides, 2.91%, in the US Yield curve (see below of 2 vs. 10 year maturities) which we suggested last Thursday evening would be a consequence of the Fed’s Discount Rate hike, has begun, helped by the first negative monthly CPI ex food and energy print since 1982 and yesterday’s sharp turnabout in US consumer confidence.

We think this trade has merit and can be constructed using ETF’s (SHY, IEF, TLT), options, and/or futures; we see flattening scope to 2.60% or lower in March.

Whether this flattening causes risk assets to resume the correction begun in January or stay within the range defined by the S&P’s highs and lows for February depends on the flattening “glidepath”….

In either event, the time is opportune to layer in high conviction short ideas, hedges (VIX 21-ish is good value for options, especially for commodity and consumer/retail themes) and wait for opportunities to add to longs which, given the slew of economic reports due next week, as well as further developments on the PIIGS front, are bound to occur…

Mind the Curve


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