05 April 2011

EDM1 : Almost Risk Free Trade

  • Current 3 mth Libor = 0.30%. Has been stuck plus/minus 1 bp either side of here since Sep10.
  • Range since Jul09 : High 0.536%; Low 0.25%
  •  Going forward, I would say 80% chance we remain a few bp either side of 0.30%. Lower bound should be 0.25%.
  • Although not absolutely certain, I think it is highly unlikely we get a fix through FF target. Would assign a probability of no more than 5% to this outcome, especially given the way stocks keep rallying and improving US labor market. Lower bound = 0% in this case.
  • Other risk case with 15% chance = liquidity squeeze and/or speculation of Fed hikes sufficiently to move actual Libor fix higher. No upper bound (theoretically).
  • Risk reward clearly favors being long Libor.
  • EDM1 is currently trading at 9968 = 0.32%. This is as close to a no-brainer sell as one can get in Rates. 2 bp (or less if EDM1 trades higher) insurance cost. I expect the Bill Dudley effect to fade in short order. 2.5 mths to EDM1 expiry with lots of opportunities for market to fret about higher rates until then (eg ECB meetings, USD weakness, good data, fresh comments from FOMC hawks).


Taichiseal said...


Taichiseal said...

Bill Dudley : "... we must not be overly optimistic about the growth outlook. The coast is not completely clear-the healing process in the aftermath of the crisis takes time and there are still several areas of vulnerability and weakness."

Market Strategist said...

May I know why you sell USDJPY?

Anonymous said...

The new FDIC rule is causing the fed effective to print lower everyday, and is impacting the libor. Nobody really understand the dynamic of the libor, so i will really not call this trade ""EDM1 : Almost Risk Free Trade" and if actually i have to choose i would rather go long...libor could drop to .20 if the fed doesnt do anything

Taichiseal said...

Thanks for the comment. I was not aware of the new FDIC rule. Will look into it more. Much appreciate the pointer.

Taichiseal said...

Cut loss EDM1 @ 9970