- Close short EUR receiver swaption 6M 10Y (exp. 4 July) at 99 ticks, profit 81ticks
- Close position to pay 2Y 1Y fwd US swaps at 0.935%, profit ½*20bp
- Close half position to pay 5Y5Y US-EUR at +40bp, move stop to +30bp
The US bond market finally surrendered
After a longer period of very tight range trading, the US bond market finally managed to sell off after strong retail sales figures, bank stress tests and a Fed statement indicating no imminent further easing.
So far we have seen a nearly 40bp intra-week move from trough to peak in US 10yr Treasury yields, which are now trading close to the highest level since late October. The sell-off has rubbed off on the European curve. Here bond yields have moved higher within the range and the curve has steepened as well (2% level in bunds was rejected).
With the sell-off being driven by the US, the spread between US and German 10yr rates has widened considerably.
While it is relatively clear that the US bond yields have established a new and higher trading range, the German curve and the EUR swap curve remain within the recent trading range. This is mostly an isolated US event and we cannot be sure whether it ends up being a medium-term correction or the beginning of a bigger and more geographically broad based sell-off in the long end of the bond curves.
US 10yr Treasury yields probably have room up till 2.40%, but from there the market is likely to need a clearer picture of economic improvement and more certainty that there will be no more central bank easing to move on. Further, the situation in Europe remains fragile and the sell-off is not likely to get much support from this side.
Eventually we believe that the more optimistic economic scenario will materialise fully in the US – and partly in Europe – but it is probably a bit early. Hence, we could easily see a period of consolidation in the bond market before another move up in yields materialises. We utilise the sell-off to lock in gains.
Recommendation wrap-up
1. We close the short EUR 6M10Y receiver swaption position to book a profit of 81 ticks – roughly half the premium initially received. The position mainly gained from the sharp decline in volatility we have seen since the start of the year rather than any uptick in EUR swap rates.
2. We close position to pay 2Y 1Y fwd in US swaps since we have seen a 20bp move up in a short period of time. Further, the position has a significant negative roll of more than 3bp per month. Hence we prefer to stand sidelined and wait for better entry levels.
3. The 5Y5Y US/EUR swap spread has moved sharply higher over the past week, and we prefer to lock in some gains at these levels. Further we lift the stop on the remaining part of the position to +30bp to protect the profit in case the sell-off in US Treasury markets reverses. 
