23 April 2010

ED Spread : Insurance Against FOMC Surprise

  • 2 day FOMC on 27-28 Apr. Given recent Bernanke relaxed comments, a (surprise) hawkish outcome is unlikely. Which also means insurance against a shift in stance (eg modification of "extended period") can be obtained relatively cheaply.
  • 3s LIBOR = 0x3 FRA = 0.32%; 6x9 FRA = 0.67% ie spread +35 bp
  • EDM0 = 2x5 FRA = 0.40%; EDZ0 = 8x11 FRA = 0.79% ie spread +39 bp
  • Any change in Fed language (assumed hawkish tilt) will cause ED Calendar Spreads to widen.
  • Have just put on long EDM0/EDZ0 spread at +39. Limit order for more at +38.
  • Floor on spread limited to current cash 3s Libor vs 6x9 spread at +35. A friendly Fed outcome is expected to compress this a little but not so much that the above affordable negative carry considerations are invalidated.
  • Plan is to run the long spread into FOMC + NFP the week after (for continuation of improvement in employment trend).

3 comments:

Taichiseal said...

Limit order at +38 raised to +39.5. Filled.

Taichiseal said...

Paid +41 for balance of intended position. Average in rate +39.8. All set now for FOMC + NFP.

Taichiseal said...

Additional @ +32.5