Forecasting the Yield Curve

Discussion in 'Fixed Income' started by stevenpaul, Oct 6, 2020.

  1. Would anyone like to discuss strategies for forming an outlook on the near-term future of the yield curve? There is so much good information on how to set up futures spreads and butterflies to act on a view about where yields are going relative to one another, and even more on the predictive use of the yield curve to forecast recessions. But what about forecasting the yield-curve itself? I would think there would be regular discussions about change in yields for purposes of day and swing trading the curve, much as there is for grains, metals, indices, etc.

    Where do you turn for commentary on whether we're likely to seeing flattening or steepening tomorrow? (No one can prognosticate, of course, but it's nice to hear arguments.)

    Besides advisory services, what general principles serve as a guide for forecasting near-term changes in the curve?

    For my part (for what it's worth), I treat spreads like any other instrument and take signals from my ichimoku system (which is another topic). The only difference between this market and others being, for me, the propensity towards mean-reversion. I am more ready to call near-term tops and bottoms in the TUF or NOB spreads than the TF or NQ outrights.

    I also trade butterflies by buying the relatively strong spread and shorting the weaker one. I don't have a rigorous system worked out, but have been generally quick to book both losses and profits. I don't think the spread market in yields is particularly trendy, so think of these trades as just that.

    None of the foregoing is offered as advice, but only to contribute something considering, that I'm seeking information from others.

    Happy trading
    murray t turtle and .sigma like this.
  2. bone

    bone ET Sponsor

    Sure, model the STIR forward curve. That's the best prognostication there is.

    I can have on a Eurodollar butterfly or condor for several months at a time.
    .sigma likes this.
  3. Thank you, Bone, for the viewpoint. Would you be willing to elaborate a little further? How does the short term interest rate curve relate to the greater yield curve, including the NOB, FYT, and BOB spreads (if that is indeed your hypothesis)?

    I am interested in curvature trading with the GE and would welcome the opportunity to discuss that, but I suspect trading the TUF, NOB, BOB, etc., afford greater opportunities to capitalize on fluctuations in the yield curve.
  4. Dynamic Nelson-Siegel. It's been around a while, but still seems to yield usable forecasts.
  5. bone

    bone ET Sponsor

    I don't think that the longer end of the curve portends greater opportunity per se. To this day, there are whale independents in Chicago trading Eurodollar futures spreads. Reason being, a Eurodollar futures Butterfly for example is very cheap to margin - a few hundred dollars on a 1-2-1. And taking 15 full tics out of a FYT is just about the same thing as taking 20 full tics out of a GE Fly.

    Personally, I would rather lever a less volatile spread that models "well" than trade smaller size on a more volatile spread.

    Yes, there are intermarket correlations aplenty with the yield curve but client NDA's prevent me from elaborating further.

    I wish you good fortune !

    stevenpaul likes this.
  6. %%
    i know what you mean about NQ tops in an uptrending bull market.
    ESPECIALLY since nq/QQQ tends to be super strong in 4th quarter +/NOV-JAN...........................................................................................NOT a prediction.
  7. bone

    bone ET Sponsor

    Clients have been taking STIR and longer dated expiry yield curve trades the past few weeks.

    Heads up ! ;)
  8. bone

    bone ET Sponsor

    Here is one example where an isolated section of the yield curve is going to relentlessly do what it's going to do regardless of the flat price outright market. The red and gold candles are an intra market Eurodollar futures Condor (Sept21-Sept22-Sept23-Sept24), and the blue and teal bars are the outright June 21 Eurodollar futures contract. In this case - selling the wings and buying the body was just golden with very little heat or doubt.