The New Doge is an Old Dog
Jun 28, 2021
By Frank Kaberna
What if there was a market that, after months of laying dormant in a range of just a few pennies, rose by nearly 100% on guidance from a major influencer? That’s right, the next Dogecoin could be 2YR Treasury yields.
S2Y \ Small 2YR Treasury Yield
Source: dxFeed Index Services (https://indexit.dxfeed.com)
While the June FOMC Meeting did not bring a change in interest rates, the Fed did talk up a potential rise in short-term rates sooner than previously thought. 2YR yields rose from 0.18% to 0.23% the day of the meeting and onto 0.26% by Thursday of last week.* It may not seem like much, but this rise accounted for a 45% appreciation in S2Y futures, which are up over 100% as of last Thursday.
Where Can Rates Go?
With Central Banks abroad fashioning negative interest rates in recent years, they could (theoretically) go anywhere. That said, US rates have never ventured below 0%, which gives the 2YR little room to the downside at 0.26% compared to historical levels.
Since 2000, 2YR Treasuries have averaged well above 1.00% even with the Fed activity of the last decade influencing yields closer to 0%. As recently as 2019, 2YR yields were above 2.00%, and they reached 6.00% back in the early aughts.
2YR US Treasury Yield*
Source: US Treasury (treasury.gov)
Realistic Expectations in Rate Trades
Active traders accustomed to symmetric profit/loss metrics when they trade could find 10 basis points, or 1.00 ($100) in S2Y futures, to be a realistic risk and reward per contract. Those willing to #hold a little longer can use historical averages to set their expectations: a trip back to 1.00% would correlate to 10.00 in S2Y futures prices.
High-flying markets with huge potential don’t always have to come in the form of something new or memed about. Asset classes like interest rates have been accessible for decades and they’re still moving hundreds of percentage points.
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*S2Y Index values between 6/16/21 and 6/24/21
*Values taken from treasury.gov as of 6/10/21