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By Bondsquawk

Shown below are two charts I found particularly interesting. The first shows the spread between 20y Zero Coupon and 10y Zero Coupon bonds while the second is a graph of 10y10y fwd. They both indicate that the curve has steepened considerably and 20y is now looking more expensive versus the 10y.

The reasons for the steepening can be attributed to long run inflation expectations increasing, nominal curve steepening (the steepening between the 10-Yr and 30-Yr in particular) as well as supply dynamics.

These factors seem to have affected the 10y – 20y spread as much as they could and the curve looks a little too steep. Right now may be the right time to enter into a 10Yr-20Yr Zero coupon flattener. The curve might still steepen a bit more given the volatility prevalent in the inflation market, and this can hurt some who are already short in the long end zero-coupons, but the curve does look steep. A 40-42 bp spread, which now stands at 38, might be a safe time to enter the flattener.

Courtesy: Raj Shah, RBS Securities

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