We have the big Fed event coming up shortly.
Having much view on the Fed cut itself we leave to pundits. One of the biggest global themes this year has been the rapid implosion of yields. Nobody has missed the German 10-year yield trading in negative territory, currently at -o.42%, ie below the ECB deposit level.
The momentum of this trend is very strong.
Imploding German 10-year yield has been a huge drag on European banks as low yields “eat” bank’s earnings. Below is the chart of the German 10 year yield versus European banks index. The relationship is rather clear.
US 10-year yield has been going lower, but holding up relatively well compared to rest of the DM yields. Fed tonight is referred to as the event of the year. 25 or 50 bps cut is the question, with the market pricing in approximately 80% chance of a 25-bps cut.
One way to hedge the Fed event is via VIX or other volatility instruments, but one of the bigger questions we ask ourselves, if the US 10 year yield is to follow global yields lower, and yes some smart guys are predicting a total implosion of yields here, what could be a “smart” trade.
If US yields decide following German yields, then the recent dislocation between yields and banks looks like an interesting way to play the Fed event.
We suggest watching the Fed and the ETF XLF today, after all they tend to move in tandem over time.
Source, charts by Tradingview