Good morning,

 

Activity in the Treasury futures calendar spreads are likely to pick up some momentum this week, as First Notice Day is on Friday, May 29.  September futures will become the lead contracts on this day.  Regarding FND, this means that any LONG positions not wishing to receive a delivery notice, will need to be liquidated or rolled to another contract by the close of business on Thursday, May 28.  With next Monday being the US Memorial Day holiday, the spread activity is likely to climax at the end of this week, with some carryover into next week. 

 

We have seen a few different views on the roll for this cycle, with very different opinions on what the expectations are for the spreads this period.  Here is a quick synopsis of the calendar spreads.  Included is a brief explanation for the varying views per product, along w/ the range for each spread during this cycle, thus far.  Also included is the median price of the spread thus far, the current pace of the spread as of 5-15 (and how far +/- historical avg) and the percentage of tail, according to 1 of the notes.

 

Spread             High              Low         Median Px      Pace       Hist Avg    % Tail     5/15/20 Stle

 

TUM/TUU     -2.25  (4/1)    -4.75  (5/13)   -4.125              5%            5%           13.6%       -4.625  

 

Bull:  Decent sized position shift from asset managers as less net long and from levered accounts as less net short.  

 

Neutral:  Asset managers’ net long positioning has ben trending lower and positions are less price sensitive.  The CTD for the Sep contract has richened relative to the front, anticipating the calendar spread becoming cheaper.

 

Bear:  (Mildly)  Spread price should be influenced by overall net long positioning and recent trends for the spread to cheapen into FND. 

 

FVM/FVU      7  (4/14)      4  (4/6)            4.5                10%             5%            4.7%          4.5   

 

Bull:  Decent sized position shift from asset managers as less net long and from levered accounts as less net short.  Historically heavy treasury supply should create a bear steepening bias to the yield curve.

 

Neutral:  None

 

Bear:  Asset managers’ net long positions are about the same as previous roll.  Positions remain price sensitive, but not as much as prior rolls.  The CTD for the deferred contract historically richened towards FND, with the speed of the richening increasing over the past few cycles.

 

TYM/TYU     12  (3/23)    6  (4/7)            7.5                5%                4%           2.3%         7.5

 

Bull:  Decent sized position shift from asset managers as less net long and from levered accounts as less net short. Historically heavy treasury supply should create a bear steepening bias to the yield curve.

 

Neutral:  Futures positioning and current richness of the roll will influence the price action in this roll.  These effects could offset each other.  

 

Bear:  Asset managers’ net long positioning is a shade lower than in the last roll cycle and remains price sensitive.  The deferred CTD is trading 1 bp through the front CTD, which is on the rich side, compared to previous rolls.

 

UXYM/UXYU  -1.5  (4/15)   -15  (4/30)   -12                1%               1%           4.2%         -11

 

Bull:  None

 

Neutral:  Asset managers’ net long positions have declined from 7% to 2%, as positions due remain price sensitive.  Levered investors, who are price sensitive, account for 6% of the short interest.  To this point, there is little open interest in the deferred contract, as these positions tend to get rolled closer to FND.  The front contract has a wild card option, given the low coupon/conversion factor of the CTD.  The price sensitivity of the spread and the wild card optionality in the front contract could offset each other.  

 

Bear:  There is a potential for less rolling activity, given the decline in positioning.  The increased likelihood of above average price volatility increases the value of the wild card option.

 

USM/USU    52  (4/15)      45  (4/21)      48              2%              3%             -0.9%         49 

 

Bull:  Decent sized position shift from asset managers as less net long and from levered accounts as less net short. Historically heavy treasury supply should create a bear steepening bias to the yield curve.

 

Neutral:  This spread has already cheapened by 2 ticks already in this cycle.  Typically, the spread cheapens by approximately 1 tick, ahead of FND.  There is increased interest in the US contract with the introduction of the 20 year note, giving investors an additional investment and hedging options.  Asset managers have increased net long positions in this sector from 16% to 30%.  Positions remain as price sensitive as in prior rolls.  Both contracts share the same CTD.  Given the amount of cheapening of the spread bus far, there may not be further to go to the downside.  

 

Bear:  The noticeable increase in net long positions will continue to keep pressure on the spread.

 

WNM/WNU   51  (5/4)    48  (4/17)       50              7%              4%              -0.9%          50

 

Bull:  (Mildly)  Relative value lends a mildly bullish bias to this roll, although positioning partially offsets this bias.

 

Neutral:  None

 

Bear:  Historically, this spread tends to cheapen by 3 ticks into FND.  Thus far, it’s approaching 1 tick of cheapening.  Asset managers’ net long positions have declined over the past year, and are insensitive to price. This tends to lead to a cheapening of the spread. The CTD’s are the same for both contracts.  The front contract does have a wild card optionality being factored in to its’ price heading to the delivery period.  Overall, the net long positions and insensitivity to price should lead to a further decline of the spread.                     

 

Best regards,

Mike