08 July 2011

EDH2/U2 Spread : Gone Long to Protect Long TY P&L

  • NFP shocker at +18k vs E+125k.
  • Grateful to my friend PT with whom I had a long discussion about ED spreads (EDH2-EDU2 was at +33) earlier in the week. Brought this back to my radar after a long 2 month bad run during which I lost a lot of my usual enthusiasm for looking at many markets.
  • Just initiated long +EDH2/-EDU2 at +24
  • Also added to long TYU1 at 123-08 after NFP.
  • Reasons for trade : 1. I do not think it is going to narrow much below +25 (=only 1 Fed hike over a 6 month period next year). Perhaps temporary dip below but should not last. At zero boundary, inversion also not likely (unless liquidity crisis when EDH2 is front month).  2. Long TY position deep in the money so a bearish interest rate strategy protects some of that profit.
  • Technically wrong trade as chart points to lower still. Going with my experience of interest rates trading here. Value judgment. This could be one of those rare trades where the right thing to do is to double up if it goes a lot against you (another eg = negative bond swap spread).

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