Image 1: 10-Year U.S. Treasury Yield Relative to the Federal Funds Discount Rate

Image 1: 10-Year U.S. Treasury Yield Relative to the Federal Funds Discount Rate
Source: Bloomberg

Ten-Year U.S. Treasury yields are a powerful tool in any investor’s toolkit. This one yield can signal so much because it digests a range of information and in turn, influences every asset class there is. Some may hold the theory that the 10-year yield is essentially the accumulation of expected short-term yields over the next 10 years. Looking at an overlay of U.S. 10-year yields and the Federal Funds discount rate, one can see the link where the market begins to anticipate changes in the Fed Funds rate and moves before the Federal Reserve actually changes short-term rates. With so many discussions about when and how much the Fed will ultimately cut (or hike), there has been a bit more volatility in the 10-year yield this year.


Image 2: ISM Purchasing Managers Survey vs. ISM New Orders to Inventory ratio vs. 10-Year Note futures

Image 2: ISM Purchasing Managers Survey vs. ISM New Orders to Inventory ratio vs. 10-Year Note futures
Source: Bloomberg

Headlines were focused on the move lower in Treasury note yields given the lower-than-expected ISM Purchasing Manager Survey. Not only was the market worried about growth slowing much more than expected, but it was also focused on the new orders to inventory ratio, which has leading properties with the index itself. Comparing each to the 10-Year Note futures, one may see that this index has some leading properties with yields. I show this by inverting the price of the generic front-month Treasury Note futures. This slowing ISM data may be suggesting lower yields and higher prices in the futures if past patterns hold.


Image 3: Generic front-month Treasury Note Futures vs. Job Opening and Labor Turnover Survey

Image 3: Generic front-month Treasury Note Futures vs. Job Opening and Labor Turnover Survey
Source: Bloomberg

Image 4: Consumer price index vs. personal consumption expenditures vs. generic front-month Treasury futures


Image 5: Economic calendar for Wednesday June 12, 2024


Image 6: Implied volatility term structure for Treasury Yield options


Image 7: CME Group Event Calculator for Treasury Yield options


Image 8: Expected return and Greeks for short WY2M4 110 straddles, protected by a 110.75 call purchase