US 5’s opened up last night in a funk. They oscillate around Eurodollar futures and became cheap at the end of last week.
Canadian 10 year futures on the other hand got rich and stayed that way – though they’re not as expensive as they were at the beginning of the week:
The two together set up a trade: sell CGB’s verses buy US 5’s and it must be volatility weighted. Here’s how the two look compared to one another:
The recent drop off in correlation is what we always wait for. If that correaltion stayed perfectly intact then no attractive spread would ever appear. (The most recent reading is distorted because the US 5 year price is current while the CGB is as of Friday)
