Using Bond Yield Spread (30y-20y) to Predict FOMC
Updated
My approach to learning trading is to consume and apply what I learned in practical experiences.
For that I like to study many different indicators and signals.
One in particular I was following last week was the Bond Yield Spread, 30Y - 20Y, as an indicator of Fed Tightening and Liquidity Shocks.
A Fintwit Market Expert explains it like this:
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Spreads are explained by interest rates, the slope of yield curve, stock market volatility and the economic environment.
Spreads widen when bond traders become less willing to replenish the order book.
A significant widening of the already wide spread between the 20Yr and 30Y recently appeared on Nov 24 and, yesterday, proved prescient.
This was a reflection of the bond markets' doubt in the Fed’s mantra that inflation would prove transitory.
Inversion in and widening of the 20-yr 30-yr spread has been a leading indicator that precedes the Fed’s tightening.
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This trend of negative spread continued to widen until it hit -0.11 on Dec 2. It's why I posted such a Bearish outlook on Dec 3.
Then I noticed before close on Dec 3 the news was far to Bearish and it felt like a trap, so I switched Long EOD Friday before close and started posting Bullish Charts.
I added an indicator to this chart at the bottom and you can see the trend continues positive and recently pulled up from the the very critical -0.06 to -0.0.7 as pointed out at the end of Nov.
It seems like there is a good support below 4700, so even if we slip below that pivot, there shouldn't be any significant pullbacks this week.
Because of this, I will be leaning Long over 4700 and Short Below.
Posts are observations only. Not Financial Advice.
For that I like to study many different indicators and signals.
One in particular I was following last week was the Bond Yield Spread, 30Y - 20Y, as an indicator of Fed Tightening and Liquidity Shocks.
A Fintwit Market Expert explains it like this:
-----
Spreads are explained by interest rates, the slope of yield curve, stock market volatility and the economic environment.
Spreads widen when bond traders become less willing to replenish the order book.
A significant widening of the already wide spread between the 20Yr and 30Y recently appeared on Nov 24 and, yesterday, proved prescient.
This was a reflection of the bond markets' doubt in the Fed’s mantra that inflation would prove transitory.
Inversion in and widening of the 20-yr 30-yr spread has been a leading indicator that precedes the Fed’s tightening.
-----
This trend of negative spread continued to widen until it hit -0.11 on Dec 2. It's why I posted such a Bearish outlook on Dec 3.
Then I noticed before close on Dec 3 the news was far to Bearish and it felt like a trap, so I switched Long EOD Friday before close and started posting Bullish Charts.
I added an indicator to this chart at the bottom and you can see the trend continues positive and recently pulled up from the the very critical -0.06 to -0.0.7 as pointed out at the end of Nov.
It seems like there is a good support below 4700, so even if we slip below that pivot, there shouldn't be any significant pullbacks this week.
Because of this, I will be leaning Long over 4700 and Short Below.
Posts are observations only. Not Financial Advice.
Note
4700 proved to be a good pivot into a short position and 4665 bounce. If downside continues below 4665 and 30y-20y continues to widen I would expect this may signal a trend reversal into FOMC/4xOpex
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