I Guess We Know The Answer To Question 10

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Anonymous
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June 18, 2009 at 6:52 PM ×

buying opportunity on EDZ9....!

you have to ask yourself...
(i) is the fed going to even hint at raising rates, given how much their chairman is so anti-deflation
(ii) what would make the OIS-Libor widen again significantly?

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Anonymous
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June 18, 2009 at 6:53 PM ×

apologies, (ii) shoudl read [..OIS-Libor basis..]

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Macro Man
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June 18, 2009 at 6:57 PM ×

Broadly speaking, and will look to add....though Reuters has run a story about the BBA widening the panel, and there's also rumblings of recent lenders starting to borrow over 1/2 year end....so I'd say there's a bit of uncertainty over OIS-Libor. I gues the question is whether you step into the breach here or see if we re-test the lows 20 points down first!

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Anonymous
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June 18, 2009 at 7:03 PM ×

july libor fixing 12 over cash (21 days from monday), would be a quick reversal and i think is more of a function of dealer desks who fix lent in stub needing to hedge after IMM rolloff which consistently happens. One thing i do know, if libor is at 1.2% in december then i want to be limit short S&Ps until then...

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Anonymous
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June 18, 2009 at 7:14 PM ×

ugh. 98.55 would be a nice place to go long...but probabyl have to pick up nickels in front of builldozers at 98.80

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Macro Man
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June 18, 2009 at 7:17 PM ×

Yes, it's squeezing even now....did a token amount just to have done it...can use the confidence boost as I seem to be suffering a "correlation event" per the comments in the previous post.

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SD
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June 18, 2009 at 7:25 PM ×

MM - wanted to ask you for pointers on how you put on (or what you mean by) this LIBOR carry trade: do you outright receive rates and wait/hope for the rolldown or do you pay/receive 2 ED Futures somewhere along the short end in a curve play? Do you do this as a cash management technique (easier/cheaper to put on/reduce duration instead of bying paper) or as a levered play on a Fed Funds + interbank risk outlook? Maybe I'm getting this whole idea wrong... please enlighten me! Many thanks

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Macro Man
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June 18, 2009 at 7:33 PM ×

SD, I'm referring to playing rolldown in the eurdollar, et al strips when the curve is steep. EDM0, for example, implies 3m LIBOR at 1.82% at the time of writing, versus spot fixings 0f 0.61%. If you don't think the Fed tightens over the next year AND you don't think OIS-LIBOR spreads blow out to last year's highs again, you can make good money owning that contract and just letting it roll down. It offers roughly 100 bps of rolldown to where EDU9 is trading, for example.

The problem is that a day like today (or payroll day) wipes out a whole lot of that carry, forcing the macro punter to walk a tightrope between a high hold-to-maturity expected value and potentially large high-frequency mark-to-market losses that risk managers and investors tend to frown upon.

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SD
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June 18, 2009 at 7:50 PM ×

MM - thanks for the reply... seems I had the right idea. Here's a (maybe) more interesting question: the trade seems to have a somewhat 'short vol' profile - after all, all the Fed can do is raise, or convince the market it will - as do most carry trades, coupled that with high MTM vol; given your macro outlook, why would you rather do that than, say, sell some OTM calls on stock indices or some sector ETFs?

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Macro Man
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June 18, 2009 at 7:58 PM ×

Fixed income markets have a policy rate anchor that is unlike anything in equities, FX, or commodities. Granted, there are still fluctuations around that anchor via changes in LIBOR-OIS spreads, but if you can get the anchor right, you have a much higher expected value in the fixed income trades than in, say, selling equity vol.

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Anonymous
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June 18, 2009 at 10:29 PM ×

funny thing is ... a large american bank started positioning for such an event about 2 days ago ... rigged market as usual ... libor panel re-shuffle wasn't exactly public knowledge untill this afternoon ... and then you wonder why all the STIR desks do so well ...

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Metafin
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June 19, 2009 at 5:01 AM ×

SD, with respect, I disagree about the "short-vol profile". Yes, the trade loses money if the Fed hikes rates, so you could argue you're short the risk of an event (a rate hike or even rate-hike chatter) and long the non-event (the Fed stays pat or keeps mum). But that's a red herring, in my opinion.

The true question is, what's the state of the world in which the Fed hikes rates, versus that in which it stays pat. I would argue that risk premia are likely to be far higher in the latter state than the former. Insofar as the rest of your portfolio is "risky", then, you want to have a behavioral hedge, which a long ED position provides.

For what little it's worth, I spent a decade trading fixed income rel-val, and we almost always had a long FF/ED position to "hedge" the rest of our portfolio, which was inevitably short event risk (nickels in front of a steamroller and all that).

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Metafin
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June 19, 2009 at 5:02 AM ×

PS. Macro Man, just wanted to say, I really enjoy your blog. I'm a long-time reader, but this is my first (okay, second) comment. Thanks!

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Anonymous
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June 19, 2009 at 2:23 PM ×

could all that selling yesterday not have been technical... Dec EuroDoallar retraced exactly the non-farm move.... going into fed week, if I were long, (which I was, but got out way before) that seems like a great price to take some profits...

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