12 04 2017 | by Victor Xing | Central Banks
10 17 2017 | by Victor Xing | Capital Markets
How we learned to stop worrying and love the “fake markets”
09 20 2017 | by Victor Xing | Central Banks
QE’s distributional effects a rising political liability
04 18 2017 | by Victor Xing | Capital Markets
Persistent low volatility threatens active fund managers
02 17 2017 | by Victor Xing | Economics
Looming risks through the prism of bifurcated housing market
01 11 2017 | by Victor Xing | Economics
Financial risk contagion: China’s capital outflow
12 22 2016 | by Victor Xing | Economics
November PCE: dollar strength weighed on goods inflation
12 14 2016 | by Victor Xing | Central Banks
A less-hawkish interpretation of the December FOMC
12 02 2016 | by Victor Xing | Economics
November Payrolls and Governor Powell on risk management
11 15 2016 | by Victor Xing | Central Banks
November FOMC minutes and debates behind guidance change
09 25 2015 | by Victor Xing | Capital Markets
Why is the 2-year Treasury note more sensitive to FED policy than T-bills?
Federal Reserve policies are indeed main drivers for very “front-end” or short maturity rates.
However, longer maturity Treasury notes such as 2 year note, 3 year note and 5 year note have other characteristics that make them more sensitive to FED policies
- Duration, or in bond investment terms, DV01 (dollar value at risk per 0.01% change in yield per $1mm notional invested). 2 year notes have a DV01 of approximately $170, 3 year notes around $270, 5 year notes approximately $480, etc. Therefore, it becomes more efficient for investors to be long or short 2 year, 3 year, and 5 year notes. If more investors are holding 2 year notes to express their views, then 2 year part of the curve would naturally be more volatile during major data or policy events (people caught on the wrong side of the trader would be trying to get out amid poor liquidity, causing price to gap in either direction)
- Express expectations of rate path. Longer maturity Treasury notes also allow investors to price in path of future hikes, such as more hikes in the next 12 months. Very front-end of the curve would be more sensitive to just “when” the next hike / cut will happen
- 3 to 5 year part of the curve tend to move the most. Investors usually price in not only when the FED will hike rates / lower rates, but also whether the FOMC will hike more / less in the days ahead, and at what pace. 3 and 5 year notes have higher duration (higher interest rate sensitivity), as well as allowing investors to express their views on a sequence of policy decisions. Therefore, it is my opinion that 3 to 5 year part of the curve is usually more sensitive to FED policy decisions.
Finally, regarding duration and ability to express views on FED’s rate path. Investors also favor Eurodollar futures (where 3 month LIBOR rates will be at a given time in the future) and FED Funds futures (where average Federal Funds rate would be at a given time in the future), because they are leveraged and allow investors to express views across specific time frames in the future.
Next article09 24 2015 | by Victor Xing | Financial Models