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BruceB wrote:
> The one spread that jumps out at me right now is the long T-Bills (30 day) /
> short 5-years...the curve is so distorted right now that 5-years are actually yielding > LESS than T-Bills...this almost looks like a no-brainer, until you remember that this
> type of thinking is what got LTC in big trouble (relationships between debt
> intruments tend to return to their historical norm)!
Bruce:
About two months ago, a friend called me telling me I should be looking at the
US ten year note to US 30 year bond spread. He said, 'It's never been out this
far! I'm going to put it on [to narrow] in the morning.'
Now, I am certainly no interest rate genius, so I put up a chart of the ten
years to thirty year spread [futures] and to me, picking a bottom in that chart
at that time didn't appeal to me, not because it didn't make sense, but because
the reason for a change in direction in that spread certainly couldn't be found
using technical analysis.
Robert posted earlier that so many of the interest rate spreads have blown out
of their normal trading areas, and as people try to pick bottoms in these
spreads around the world, they join the dead littered along the road. I
absolutely agree that if you trade anything that is making new lows [or highs],
these extremes of price do not make them good buys [or sells] at current prices.
Whether it takes a policy change [a fundamental] or a crossing of a trend line
or moving average[ a technical], I think it's best to have a solid reason for
entering trades that against what has been a major trend.
And of course, please always remember that we all can be wrong. It's better to
take a sensible sized loss if you are wrong than to be standing in line knocking
on the Fed's door. Some of us are small enough to be allowed to fail.
Best,
Tim Morge
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