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CIBC Recommend Trading Extension Seasonals Later Than Usual

CANADA
  • CIBC note the upcoming December index extension, with an aggregate extension of +0.075yrs between Dec 1, 2 and 15 (C$12.3B rolling out and C$12.9B coupon cash being returned).
  • Mid and long segments see larger extensions of +0.151yrs and +0.366yrs.
  • “Averages since 2018 suggests that 2s10s flattens into the extension and steepens during it. In contrast, 10s30s flattens into the extension and moves very little once through the extension windows”.
  • There are some reasons why this year isn’t usual, including that the long-end being very expensive even if CAD 10s "look much cheaper on the curve relative to the U.S.”
  • “We see risk to the recent rally, and expect duration to cheapen as we head into the extension. The starting point of the curves leaves us liking 2s10s flattening as opposed to 10s30s flattening. The reality is that both should show marginal bear steepening if we are right on our duration view ahead of the extension. This means we’ll need to trade the extension seasonals later than usual. The macro rates view is that investors should enter into 2s10s flattening in the 1w prior to the extension.”
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