Bond Experts: Three-Year Note Musings

In my original post this morning I was somewhat negative on the 3 year note because I thought that the widely held and very crowded trade is the curve steepener. I think that works to the detriment of the 3 year note and I believe that the trade which hurts the largest number of people this week is the bullish flattener.

It has been very easy to make money by shorting the supply. At some point that lighted stick of dynamite will blow up in the hands of the holders and it feels at though this may be the time.

In support of the 3 year note one trader and former customer and friend of the blog (steadfast friend) noted that carry and roll down is compelling and comments such as those of Janice Yellen last week that the funds rate would be low for years support that trade. My friend said that if one buys the 3 year note at 1.50 percent and finance it each day in repo at 0.25 basis point then your breakeven one year from now when it is a 2 year note is 2.08 percent.

The 2 year note curently trades at 0.94 percent and makes the case for the current 3 year rather compelling if you believe that financing will remain unchanged for the an extended period ( to coin a phrase.).

Comments

[oldman:]

The ETF for 1-3 year CSJ has been trading at a premium. Explanation?

Jul 08 10:54 AM