With GC-Repo Carry Over And FX Carry In Doubt, Are Traders Forced To Ride The Curve For Trade Funding (Butterfly Spread)

Following ongoing disruptions in FX funding trades (and following last month's JPY fiasco we doubt anyone will bet all of the "Other People's Money" on this previously sure-thing trade), and the ongoing devastation in the GC-IOER (repo-reserve), which today printed at a whopping 2 bps (a 100% surge from yesterday!), a new carry trade appears to have emerged, one which was all the rage about this time last year again: the 2s10s30s butterfly. As the second chart shows, the R2 between the butterfly and ES is now back to almost 1.000. In other words, the stock market now appears to be correlating very closely to the relative underperformance of the 10 year compared to the 2 and 30 Year tails. With today's 10 Year auction imminent which will likely see a sell off into the auction of that specific spot, following a reversion post the auction, we may see an inverse move in stocks pre and post 1 pm event.

Repo carry continues to be dead:

And 2s10s30s:


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