Stocks In Hot Pursuit To Close Butterfly Spread Divergence

Tyler Durden's picture

The 2s10s30s butterfly - ES correlation trade proves its mettle once again. After hitting a low of 162 bps at the same time as the market dropped, the butterfly spread has jumped aggressively on the very successful 30 Year auction, with stock lagging substantially. Not for long though. As the market just demonstrated when it woke up to this divergence, ES ramped rapidly higher on no news but merely a substantial divergence from this latest carry trade (correlating better with stock than FX carry ever since the GC-IOER carry collapsed). Any time this trade diverges by 5 bps or roughly 10 ES point, the correct trade here is to put on a compression between the two, at least until banks, with the Fed's help, succeed in regaining control of general collateral rates. In the meantime, for those with a more macro focus, as Credit Trader points out: "flatteners, flatteners, flatteners."