BNP Study Suggests Curve Steepeners as Winner Post Emergency Fed

(Bloomberg) -- Bets on short-dated Treasuries outperforming longer-term ones, and on spreads between contracts on the VIX index of U.S. stock volatility are among the most consistent winners in the wake of emergency Federal Reserve policy moves, according to BNP Paribas SA.

“We are looking for the common factor. The trade for all seasons,” Kaushik Banerjee, global head of macro research at BNP in London, said in an email Monday after his team studied the performance of various wagers after inter-meeting Fed decisions.

Trades that had consistent reactions included, according to BNP’s analysis dated March 6:

• A steeper U.S. Treasury curve, with wider two-year/10-year and two-year/five-year swaps
• A decline in U.S. 10-year and five-year swap spreads
• Higher premiums on BBB rated credit -- the weakest tranche of investment grade
• Bets on VIX calendar spreads; the VIX itself declined in all but one case

“Steepeners are the best,” Banerjee said via email. “They worked when the Fed cut rates and now the front end is anchored. The Fed is not expected to move for a long time -- and as recovery takes hold, the longer end of the UST curve should sell off, steepening the curve. So it works two ways.”

The analysis looked at moves within 30 days around the inter-meeting Fed moves. BNP considered a large number of trades, finding that benchmarks including the S&P 500 Index, DXY dollar index and 10-year Treasuries didn’t have such consistent moves.

Fed policy makers have enacted stimulus on seven occasions between scheduled meetings dating back to the 1990s, with the most recent coming on March 3. The central bank also brought forward this week’s gathering to March 15.

“There is a popular misconception that once the Fed cuts, equity markets and bonds rally and the U.S. dollar sells off,” Banerjee said. “That’s a myth and not supported by data. It’s worth looking at history and resetting expectations.”

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