Any treasury yield strategy pertaining dollar eyes modification due to unlikely fed’s rate stance

We had earlier advocated in the month of August that we did not expect large moves in US yields in the near term and recommended selling 3m*5y straddles, which appeared rich. While selling 3m*5y is still attractive, investors looking for a limited-loss way to position for range-bound intermediate rates in the US should initiate calendar spreads. Specifically, we recommend selling USD 2m*5y straddles versus buying USD 4m*5y calendar spreads. From a vol perspective, USD 2m*5y vol is roughly at par with USD 4m*5y, at c.81 bps/y. However, in our opinion, USD 4m*5y should be trading at a premium to 2m*5y vol.

This is because of our view that the Fed is unlikely to hike in September and rates are likely to be range-bound in the near term. On the other hand, 4m*5y option expires in January and encompasses the December FOMC meeting - the outcome of which is more uncertain, in our view. Further, it encompasses the month of December, when liquidity could be low and rates could be susceptible to sharp movements. As a result, we recommend buying 4m*5y vol versus 2m*5y.