February’s US Treasury market activity in review

Published on 25 March 2021

In our review of February’s rates markets, we look at trading in US Treasury securities which saw a significant sell-off at the end of the month. The shift in repricing to the front end of the yield curve was the defining issue in February’s rates markets, says Greg Faranello, head of US rates strategy and trading at AmeriVet Securities, and price action in the market appears to challenging the Fed’s premise.

Lessons to take forward include a review of market structure, with a need for a broader-based and more inclusive sponsorship of the Treasury market in the future to underwrite the ton of debt being issued.

Dan Barnes Welcome to TRADER TV – your update on trading for professional investors. I’m Dan Barnes. Joining me today is Greg Faranello, head of US rates strategy and trading at AmeriVet Securities. We’re going to discuss the rates markets in February. Greg, welcome to the show.

Greg Faranello Thanks for having me.

Dan Barnes What were the defining events in rates markets in February for you?

Greg Faranello I actually go back to January, the Georgia run-off election, if you will. I think that was a defining moment for markets, for the Fed, and then we fast forward to February and we look at this Masco fiscal situation that we’re having right now in terms of spending, but then the repricing of the rate market shifting more to the front end of the yield curve. So we’ve had this long end repricing that we know, but I think what was defining in February was more shifting that to the front end of the yield curve.

Dan Barnes And then how did that affect trading volumes and volatility?

Greg Faranello The volatility obviously picked up, right? I mean, I think any time you have a repricing in terms of expectations for Fed policy and we did see that shift and I follow the LIBOR markets very closely. You saw a repricing in terms of the timeline of when the Fed was actually going to lift off. And we’re going to hear from J. Powell, and it’s going to be a very interesting meeting in terms of dot plot, but I think that was really the volatility in the market. I think most market participants expected the long end, the repricing, because of inflation expectations and what the Fed is trying to accomplish. But I think it’s really more on the short end that really caught the market in terms of volatility.

Dan Barnes What challenges did that create for you in terms of trading in the markets?

Greg Faranello Volumes increased clearly. I mean, there’s no question about that. I think the market has calmed down somewhat. We look at 10 year, now. I mean, 160 to 162 has been a very critical level. We’ve been flirting with that now for quite some time. I think the Fed is going to continue to be dovish. The market is looking at the economy. They’re looking at what the economy is expected to do in the second half of the year, and I think the price action is challenging the Fed’s premise at this point.

Dan Barnes Do you think there are any useful lessons that traders can take forward for the rest of the year from what we saw in February?

Greg Faranello Yeah, so the market structure, right? We need broader based sponsorship for this Treasury market. I mean, we’re issuing a ton of Treasury debt. That’s not going to stop. I mean, that’s what we’re hearing from Washington. So if I’m the Fed, I’m looking at broader base. They talk about broader based inclusive in terms of employment. I think we need to talk about broader based and inclusive with regard to Treasury liquidity and the underwriting of this debt going forward. So no real lessons per se, but I know the Fed is watching. When you listen to the chair, when you listen to Fed Governor Brainard, they’re very clear. They are watching orderly versus disorderly. I think that’s a key thing going forward.

Dan Barnes Absolutely, this is the market to watch in 2021. Greg, that’s been great. Thank you so much.

Greg Faranello Thank you.

Dan Barnes I would like to thank Greg for his insights today and, of course, to you for watching. To catch up on our other shows or to subscribe to our newsletter, go to TRADERTV.NET.