Prepared by Jack McIntyre

Buy the 2's/5's/10's butterfly (buy the “wings” and sell the body). Current spread 11bps. Target 20bps. Stop 4bps.

2's/5's steepeners. Buy the 2-year T-note and sell the 5-year T-note (use duration neutral weightings). Current spread 20bps. Target 30bps. Stop 16bps.

5's/10's flatteners. Sell the 5-year T-note and buy the 10-year Note (use duration neutral weightings). Current spread 8bps. Target 4bps. Stop 12+bps.

As you can tell, all these trade ideas are related. In fact, #2 and #3 when combined, make up the first trade idea. We like either the 2's/5's steeper or 5's/10's flattener either as separate trades or as a butterfly trade.

We like the 2's/5's steepening trade because of its market directional bias. This spread typically steepens when the overall Treasury market comes under selling pressure. In this case, with the market taking on a more defensive tone going into next Tuesday's ECI release, the 2-year auction and Wednesday's Greenspan's testimony to the JEC, we expect the 2-year sector of the curve will outperform the 5-year sector.

We like the 5's/10's flattening trade because with all the corporate issuance that has hit the market of late and the unwinding of the hedges related to this process should result in the outperformance of the 10-year sector of the curve. If the Treasury market does rally from current levels, we would expect to see duration extension flows drive the outperformance of the 10-year sector relative to the 5-year sector.

One reason why the 5-year sector of the curve could lag both the 2-year and 10-year sector is that the portfolio management community appears to have a greater relative overweight in the 5-year sector of the curve, so if this process of the Treasury market coming under more selling pressure continues, it would make sense for their to be more relative to selling pressure in the 5-year sector of the curve relative to the 2-year and 10-year sector.)

October 22, 1997MCM, Inc.

294 Washington St, Ste. 734, Boston, Massachusetts

Financial Commentary

THE ALLENDALE ADVISORY REPORT | STRATEGY FOCUS | WEEKLY OUTLOOK
ECONOMIC PERSPECTIVE | FED STEER PRICES GOING NOWHERE FAST
U.S. ECONOMIC AND INTEREST-RATE OUTLOOK
STICKING WITH THE U.S. TREASURY MARKET | THE TODD MARKET TIMER
CASH AND BONDS-- THE RODNEY DANGERFIELDS OF FINANCIAL ASSETS?
MYERS ON FUTURES | THE COPPER JOURNAL | COMMODITY FUTURES FORECAST WEEKLY REPORT
INTEREST RATE WATCH | NIKKO MARKET COMMENTS

Consensus National Futures and Financial On Line Index

Copyright 1997, by Consensus Inc.  All American and Pan American rights Reserved. editor@consensus-inc.com

Hosted by:
One Crossroads Place
610 West Maple Ave, Suite WWW
Independence, MO 64050
(816) 252-4080
sysop@kcmo.com

wmeubank@ocp.kcmo.com