Yield Curve: 10-Year less 2-Year Yield: Ways to Profit
The iPath Flattner (FLAT) and the iPath Steepner (STPP) are two ETNs that can be used to potentially profit from changes in the 10-year less 2-year yield curve. FLAT should increase in value when the curve flattens, while STPP should increase in value when the curve steepens.
The iPath Flattner and iPath Steepner issues are thinly traded. Therefore limit orders should be used and the indicative value of the ETN should be reviewed to determine if the premium or discount is suitable for your situation. The indicative value ticker symbol should be STPP.IV and FLAT.IV. If they don't work try $STPP.IV and $FLAT.IV or call your data provider.
More information on FLAT can be found here: http://www.ipathetn.com/us/product/flat/
More information on STPP can be found here: http://www.ipathetn.com/us/product/stpp/
Let's look at the historical 10-year less 2-year yield spread:
Here is a longer-term chart: 1990 - YTD
(click to enlarge)
Now let's look at a shorter-term chart: 2011 - YTD
(click to enlarge)
What has happened to the yield curve in 2012?
The 2012 range has been.
- 200 basis points was the high
- 138 basis points was the low
- 139 basis points as of May 18th
The 1990 to YTD range has been.
- 291 basis points was the high
- (52) basis points was the low
May 18, 2012 Yields:
- 0.32%: 2 year yield
- 1.71%: 10-year yield
- 139 basis points spread
What is the 2012 price range of the FLAT?
- 61.80:High
- 55.48: Low
- 61.78: Close May 18th
What is the 2012 price range for STPP?
- 42.99: High
- 36.64: Low
- 36.64: Close May 18th
Here's a link to the chart
Where might the yield curve be headed?
Given the current low yield level on the 2-year and the 10-year issues, it is a tough call. The shorter-term chart suggests that the trend is for a flatter yield curve.
Should the 2-year yield move up and the 10-year yield hold steady it is possible to have the yield curve invert. An inverted yield curve takes place when shorter-term interest rates exceed longer-term interest rates. This normally happens when the Federal Reserve is attempting to cool economic growth. The current economic conditions do not warrant this outlook, in my opinion though I could be wrong.
Might fear or panic based buying push longer-term interest down? Possible, but the risk-reward at this time does not suggest that is likely. There will come a day when the treasury bond bulls will want to exit positions. The question is, who will buy and at what price?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
