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Friday, February 24, 2023
Pair Trade Analysis - T-Bond Ultra and Euro Buxl
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*This performance is only observed with historical backtests and not traded by the company.
The product and investment ideas do not consider the risk profile and financial position of the recipient and may not be suitable for everyone. Trading in financial markets and use of margin involves a significant risk of loss, which can exceed deposits. Please read the complete disclaimer carefully.
Risks & Assumptions
The Buxl is a sovereign bond issued by Germany’s federal government to raise proceeds for meeting financial expenditures. Meanwhile, the US Treasury Bond Ultra is a low-risk government debt instrument that is generally risk-free when held until maturity.
US-Germany 30-Year Yield Spread
Data Source: Bloomberg
This graph illustrates the spread on the yields between the US 30-year bonds and German 30-year bonds. This spread has narrowed down considerably to a key support level of 143.27 basis points. This spread is expected to widen over time because the ECB is likely to moderate its pace of tightening, subject to new economic forecasts due in March 2023, and to prevent financial instability and recession in the already troubled eurozone economy. Meanwhile, the Fed’s monetary policy needs to remain restrictive for longer considering the hotter-than-expected January CPI print, persistently tight labor market, resilient consumer demand, and heightened retail spending. In practice, this would result in the Euro Buxl outperforming T-Bond Ultra, given the inverse relationship between yields and prices.
|Contract||Ultra 30-Year Treasury Bond|
|Contract Months||March, June, September, December quarterly cycles|
|Trading Hours (UAE Time)**||03:00 AM – 10:00 PM (Mon), 03:00 AM – 12:00 AM (Tues),
12:00 AM – 02:00 AM and 03:00 AM – 12:00 AM (Wed, Thur, Fri)
|Contract||Euro Buxl (Futures on 24-35 years government bond 4%)|
|Contract Months||March, June, September, December quarterly cycles|
|Trading Hours (UAE Time)**||04:15 AM – 12:00 AM (Mon), 12:00 AM – 01:00 AM and
04:15 AM – 12:00 AM (Tue- Fri)
Data Source: CMC Markets
** Subject to change
Economic reports drive forecasts for future fed funds rates higher
The Federal Reserve Bank of Cleveland computes the “trimmed mean and median” to eliminate outliers that distort the real picture. The trimmed median has soared to a fresh high above 7%. Meanwhile, although the trimmed mean has retreated from its peak; it remains well above 6%. This has led investors to believe the Fed’s monetary policy stance is unlikely to veer towards a pause or pivot any time soon. The Fed would require substantial and consistent evidence of inflation moderating across all areas of the economy before it considers taking its foot off the pedal. Therefore, with the Fed’s current stance, the T-Bond Ultra is expected to continue underperforming relative to the Euro Buxl.
Data Source: Bloomberg
The Atlanta Fed conducts a comparative analysis of flexible inflation relative to sticky inflation. The chart below illustrates the moves over the past three months on an annualized basis. It reveals that sticky inflation remains firmly above 6%, stoking fears that inflation is becoming embedded.
Data Source: Federal Reserve Bank of Atlanta, Bloomberg
Risks and Assumptions for Back-tested trading strategies
Data Source: Bloomberg
Arun Leslie John
Chief Market Analyst
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