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%.
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*
Source: US Treasury (treasury.gov)
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
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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*Values taken from treasury.gov as of 6/10/21
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