29 April 2010

ED Spread : Risk Canary

  • +EDM0/-EDZ0 calendar spread is biggest trade in my Core Book now.
  • Reasons for trade already explained elsewhere. [FOMC insurance - expired now, with no adverse consequence; and stronger US economic data, in particular NFP]
  • I have no problem if I turn out to be wrong on my call for stronger economy and higher rates. Losing money on a trade as a result of being wrong is part and parcel of trading.
  • What would be unfortunate is if some other risk factors come into play and screw up my trade here.
  • One such "other" risk factor = Worries about banks' PIIGS debt exposure leads to interbank funding pressures = Upwards pressure on very short end of money market curves = Sharp selloff in EDM0, flattening the calendar spread.
  • Early signs of such stress in the system will be reflected in sudden, sharply higher fixings in short end Libors eg 1 week and 1 month, and not necessarily just in USD or EUR.
  • Will have to start looking at daily Libor fixings for such signs as long as I have the trade on. Working from home, outside an interbank environment, this would have to be a conscious effort. Any help I can get would be greatly appreciated.
  • Accompanying screen shot = today's libors. All fine.

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