Let’s assume an inverse relationship continues to play out with Treasuries and the stock market. My feeling is that the stock market will stabilize in the coming weeks and while staying range bound, will trade higher in the preceding weeks. Not a bull market but a trade back near the levels seen in the Fall. That said, if securities move higher we should see Treasuries trade lower.
As it stands now both 30-yr. bonds and 10-yr. notes are near two-month highs. Could we trade to their July highs? While I see it as a possibility, it's not very likely. So the question is, how to structure a trade?
The 'NOB' Spread
I want to gain light bearish exposure with clients without trying to pick a top at current levels. Hence, a NOB spread. I will go with my bearish bias and short 30-yr bonds while at the same time going long 10-yr. notes 1:1. The idea is that 30-yr. bonds will move more and -- ideally -- we'll chose the correct direction: lower. This strategy accomplishes three things, it lowers your overall margin, it allows you to be flexible giving the option of legging out of the trade and, assuming we are wrong getting short 30-yr. bonds, our loses should be marginally offset with the 10-yr. note position. If this trade works and 30-yr. bonds in fact move lower we are looking for a net profit as the 10-yr. note leg will be a loss.