each can be converted into fuel—corn in the
form of ethanol and soybeans in the form of
biodiesel. Much like the crack spread, the
soybean/corn ratio can also offer insight
into the relative strength of energy refiners.
More recently, the ratio has been used as
a proxy for trade policy, specifically regarding U. S.-China relations. China has historically been a big importer of soy products,
and negotiations typically include soybeans
as a bargaining chip. So the ebb and flow of
trade policy can, and does, affect the soybean/corn ratio.
YIELD CURVE RATIOS THAT MEASURE IT
If you follow traditional fundamentals,
you’re likely familiar with the yield curve—
the graphical representation of interest
rates from the overnight federal funds rate,
the 30-year Treasury bond, and all points in
between. There are a number of ways you
can track and spread the various points on
the curve. But to do it, you’ll need to understand the ratios.
Treasury futures are quoted as a percentage of par value, rather than in basis
points. But each contract can be roughly
normalized to another in terms of the dollar
value of a one-basis-point change (“DV01”)
by means of a predetermined hedge ratio.
Some of the more common include:
If you look at a chart of one of these
formulas on the thinkorswim platform, a
rising spread price indicates a steepening
yield differential. If the price is decreasing,
the yield spread is flattening.
Why should you care? A positive-sloping
curve—shorter-dated maturities yielding
less than longer-dated ones—is considered
“normal” because longer maturities have
more exposure to inflation and other risks.
In normal conditions, traders are compensated for the higher risk by earning a higher
interest rate on longer-dated Treasuries.
But sometimes the curve flattens out or
even flips to the negative. When it does, it
can be a sign of economic trouble brewing.
It indicates traders are shifting from stocks
and other riskier investments to the relative
safety of the U.S. bond market.
Plus, the banking system relies on a
positive-sloping yield curve. The traditional model is to pay interest on shorter-term
deposits like checking accounts and CDs,
while collecting interest on mortgages, auto
loans, and other long-term commitments.
So a flat or inverted yield curve could put
pressure on the Financials sector.
SCRATCHING THE SURFACE
These are a few of the many ways you can
use futures ratios for fundamental analysis.
If you want to explore other ratios, there are
plenty more out there. In the metals world,
for example, you could plot gold—
historically seen as an inflation hedge and overall
safe haven—versus an industrial metal like
platinum or copper. Or gold versus crude
oil. And in the agriculture world, the venerable hog/corn ratio indicates more than
pork production profitability; a rising ratio
has also been shown to correlate with a
strong consumer demand. And because
FIGURE 2: Plotting the corn/soybean spread. From the Charts tab, you can plot the futures ratio on
thinkorswim by typing in the spread symbol. It’s easiest to visualize the spread as a line chart.
Source: thinkorswim® from TD Ameritrade. For illustrative purposes only.
we’re talking ratios, let’s not forget the foreign exchange market, which is made up of
currency pairs—essentially the ratio of one
nation’s currency to that of another’s.
WHE THER YOU’RE TRACKING
fundamentals as secondary indicators for the equity
markets or trading futures products outright, ratios can become your friends. It’s a
big, interconnected world out there. With
ratios, it’s all relative.
Doug Ashburn is not a representative of
TD Ameritrade, Inc. The material, views, and
opinions expressed in this article are solely those
of the author and may not be reflective of those
held by TD Ameritrade, Inc.
Futures and futures options trading are speculative and are not suitable for all investors. Please
read the Risk Disclosures for Futures and Options
resources/pdf/TDA631.pdf) prior to trading
futures products. Futures accounts are not
protected by the Securities Investor Protection
Corporation (SIPC). Futures and futures options
trading services are provided by TD Ameritrade
Futures & Forex, LLC. Trading privileges are
subject to review and approval. Not all clients
will qualify. For more on the risks of trading and
trading futures, see page 38, #1 & 3.
SPREAD NAME RATIO SPREAD FORMULA
2 YR - 10 YR 2:1 2* /ZT /ZN
2 YR - 30 YR 4:1 4* /ZT /ZT
5 YR - 10 YR 3: 2 3* /ZF2* /ZN
10 YR - 30 YR 2:1 2* /ZN /ZB