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Are 0% Rates the New Normal?

Jun 17, 2021

By: Frank Kaberna

Though they employ the same word, the two phrases “return to normal” and “new normal” are diametrically opposed. If you’ve witnessed a live television commercial break in the last month, then you’re probably aware of society’s return to normal; while interest rates, on the other hand, are threatening a new normal as they fail to lift off 0%.

Making a New Normal

The 2YR yield currently rests around 0.15%, which is only 6 basis points higher than its all-time low of 0.09% made in February.* Since 2000, the 2YR has averaged 2.00%, but it’s spent more than 40% of this period below 1.00%.* Putting the magnifying glass on 2010 to present, 0% yields certainly seem more normal than those in higher positive territory.

 

2YR US Treasury Yield*

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Source: US Treasury (treasury.gov)

 

Waiting for the New New Normal

As option traders who’ve watched implied volatility levels circle lows know all too well, new normals can permeate markets for extended periods. While rolling your reversion-to-normal play in Small 2YR Yield futures isn’t the worst thing in the world, most people probably want something that could pose quicker results.

Yields can stay low for a long time, but they rarely do so without some turbulence from their highly correlated friends in the stock market. In the same time that short-term yields fell and sat around 0%, Small Stocks futures moved almost uninhibited to and through all-time highs. Trading SM75® from the short side against long S2Y could profit from either yields making up ground on stocks to the upside or stocks underperforming in a selloff.

 

Push in Yields, No Pull in Stocks

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Source: dxFeed Index Services (https://indexit.dxfeed.com)

The notion of a new normal often alarms people, but the actual shift can happen without those same individuals even noticing. Low yields aren’t necessarily a reason for fear, but they do present a set of historically rare opportunities.

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Save Every Time You Trade the Smalls

The Small Exchange has also created a limited number of subscriptions for a one-time payment of $100 that give traders a lifetime of reduced exchange and market data fees when trading the Smalls.

For more information on the Small Exchange’s products and subscription service, visit smallexchange.com. And be sure to check out my new show on tastytrade, Small Stakes, where Pete Mulmat and I will show viewers how to navigate Small Exchange products every Monday-Friday and always on demand.

If you’d like to find out where to trade the Smalls products check out the list of brokers that offer their products, or tastytrade’s preferred broker tastyworks


*Values taken from treasury.gov as of 6/10/21

© 2021 Small Exchange, Inc. All rights reserved. Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information in this advertisement is current as of the date noted, is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Trading futures involves the risk of loss, including the possibility of loss greater than your initial investment.


Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

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