Guest Post: The Fed's Distortion Of The Butterfly
Submitted by John Lohman
It’s interesting to note that the 2s-10s-30s butterfly has been a funding source and part of the risk trade since the Fed decided to set the price of all things risky in November of 2008. It hasn’t been as meaningful as the FX carries or some of the other risk trades, but a factor nonetheless.
Over the last ten years, the correlation coefficient between the 2s-10s-30s butterfly and the S&P 500 has been -72.5% (using daily data). Of course, the Fed has eliminated every ounce of market integrity in the 458 trading days since it became the marginal price-setter, so this relationship (like so many others) has been obliterated. The impact of the Fed’s financial douchebaggery are best illustrated by comparing the last 450ish trading days with the 450 trading days prior to mid-November ’08.
It’s interesting to note the last divergence (early summer 2009) was resolved by the S&P 500 following the butterfly (think Mike Santoli’s “the bond market’s idiot kid brother”). Perhaps unlikely, but a convergence here would equal SPX 870!