ST Note - Nothing but yield curve ST Note - Nothing but yield curve ST Note - Nothing but yield curve

ST Note - Nothing but yield curve

Junvum Kim

Sales Trader

Summary:  Further flattening or inversion is possible but with the recent downshift consensus with descending inflation numbers, it would be worth watching for trade setup by buying the spread - buy 2 year futures ZTH3 and sell 10 year futures ZNH3 - with reward risk that could favor a steepener instead.

Chinese market returns after a long break but this week is huge with heaps of market events starting with FOMC rate decision followed by the earnings of three trillion market cap stocks – AMZN, GOOGL and AAPL - then of course non farm payroll (est 175k) and unemployment (est 3.6%) to wrap things up.
S&P500 has already started the new year with YTD return +6% breaking above psychological level 4,000 where both 200DMA & downtrend (from all time high 4,818) coincided.  As a result of this laggy looking Santa rally, S&P500 PE is nearly 20 times compared to low 17 back in October last year and so far 143 companies reported with +0.9% sales and +2% earnings surprises.

Last Friday two stocks stood out in relation to the inflation expectations.  AMEX 4Q results showed record quarterly card spending and indicated 2023 guidance for sales & earnings topping estimates.  Further more, similar to BHP that reached all time high $50 level recently, Caterpillar (CAT) has hit record high $266.04 heading into earnings tomorrow night and the focus is expected to be on the machinery producer’s demand forecast for this year.
Another observation is on silver (XAGUSD) that has gained ~40% from last year’s support level $18 while testing big downtrend (from double top $30 that was formed during 2020 – 2021).  Given its industrial uses and half precious metal status, China reopening anticipation seems to be fully priced in and major driver behind the recent base metals that also have rallied and is showing resilience. 

This month so far, broad based US dollar weakness coincided with falling VIX below 20 and credit spread declining towards 450bps on the back of falling treasury yields in the range between 20 and 40 bps particularly from 2 years onwards.  However the below graph shows shifts in yield curve of key tenors between now and 15th dec 22 when the last FOMC meeting took place with economic projections including non-accelerating inflation rate of unemployment (NAIRU) at 4% and PCE price index of 2%.  Clearly the big swings – rise in yield – were concentrated on the short end of the curve all the way upto three months while 10 year & 30 year increases were relatively subdued therefore resulting in bear flattener (short end rising faster than long end).

Most recent unemployment rate was 3.5% that is the lowest in 50 years and below NAIRU 4% so there is about 0.5% gap in between.  Also last week’s Dec core PCE YoY was 4.4% - the lowest out of four measures of inflation - therefore both of these figures still seem to suggest inflationary condition still exists hence current futures market’s implication of mere two 25bps hikes next two meetings taking the terminal rate at around 4.9% looks to be far from the reality so USD weakness may not last for long – particularly against AUD (S&P500 sensitivity) and JPY (carry trade) that both had the biggest returns of 6% among G10 currencies post last FOMC meeting - with potential reversal being a scenario that shouldn’t be ruled out.

Another component of the yield curve other than direction of yield is anticipating whether the curve will steepen or flatten.  Two of the mostly watched spreads – 2y10y (-70bps) and 3m10y (-110bps) - have been extremely inverted for some time hence raising the probability of recession based on the historical correlations.  Major driver behind the inversion of the yield curve has been a significant rise in short end of the curve reacting to Fed’s rate hikes in typical fashion and may continue to see further flattening or inversion but with the recent downshift consensus with descending inflation numbers, it would be worth watching for trade setup by buying the spread - buy 2 year futures ZTH3 and sell 10 year futures ZNH3 while matching duration or DV01 (dollar value of 1 basis point change) - with reward risk that could favor a steepener instead, should the inflation remains elevated above the Fed’s target longer than expected alongside record low level of unemployment while also we have seen AU (7.8%) & NZ (7.2%) with higher than expected CPI last week.

e.g. Long 100 lot ZTH3 and short 52 lot ZNH3 with spread ratio of 0.5169 (DV01 of $34.11 / $65.98) in the anticipation of profiting from steepening either by long end yield rising faster than short end yield (bear steepener) or short end yield falling faster than long end yield (bull steepener) but loss from more flattening and breakeven from parallel shift which is probably most unlikely scenario.

Yield curve shift
2y10y and 3m10y of yield curve spreads


The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (
Full disclaimer (

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region


Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.