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Your Currency Trade on Rising Treasury Yields

Traders work in the ten-year U.S. Treasury Note options pit at the Chicago Board of Trade in Chicago, Illinois, U.S.
Daniel Acker | Bloomberg | Getty Images
Traders work in the ten-year U.S. Treasury Note options pit at the Chicago Board of Trade in Chicago, Illinois, U.S.

In case you hadn't noticed, Treasury yields are on a tear. Here's how to trade them.

How about those Treasury yields? By the end of trading, they had reached their highest levels since May of 2011 - and naturally the dollar got a lift at the same time.

Meanwhile, market volatility is low, and currency trading is thin. So how can you trade the Treasury move?

Rebecca Patterson, chief investment officer at Bessemer Trust, wants to fade it. She says bond yields are going up because investors are less alarmed about the euro zone debt crisis, and U.S. economic data has been mildly encouraging. Also, investors have extended long-duration Treasury positions, and many are covering those positions.

"Is it good for the dollar? It's good for the dollar against some currencies, specifically the yen," Patterson told CNBC's Melissa Lee. In the past, she says, the yen was often used as a funding currency - the currency to short against others with higher yields - and that relationship is back.

"Right now with this rise in yields, about 40 basis points just in the last few weeks, the dollar has gotten a lift against the yen, i.e. it's better to borrow yen."

But Patterson is not convinced the high yields will last.

"We're seeing what I fear is complacency. Is the U.S. data really good enough to justify this? Is Europe really solved?" she asks. "I don't see 10-year yields extending much beyond current levels," especially since they are approaching some key technical levels.

So Patterson wants to sell the dollar against the yen, setting a tight stop because of the current low-volume trading environment. She recommends entering the trade at 79.65, setting a stop at 80.50 and a target of 78.00.

"This is a short term trade," she warns. "I would be very careful holding this position into Jackson Hole with Bernanke and Draghi speaking, because that's going to be huge event risk." She also points out that another positive economic indicator, like a strong durable good report, would keep 10-year yields aloft. However, she says, "I just think with a lot of short covering done, this rally is more likely to fade sooner rather than later."

Todd Gordon, co-head of research and trading at Aspen Trading Group, likes the trade. He thinks the 10-year yield is at a technical resistance level, as is the dollar-yen pair.

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