US10YY : SHS Downside Objective Met

• Long-standing downside objective for US10YY here at 2.51%. Low last night at 2.54%. To all intents and purposes, consider objective met and square up. Stay away!
• Was running long TY against smaller long EDH2/U2 spread. Now left with the ED spread naked. At +3.5 low and at ZIRP, this is the time to hit it (buy spread) in size.

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).

ED Futures : Short EDZ1 Outright

• Unlegged EDM1 leg of long EDM1/Z1 calendar spread by sale of EDM1 @ 99.645. Naked short EDZ1 now. 
• EDM1 stands to pay me max 4-5 tics over the next 3 months (= less than 2 bp per month! no brainer to get rid of) vs huge potential downside risk should there be a liquidity squeeze on the front end of rates and/or credit issues resurface.
• Entire exercise has worked out wonderfully. Original long spread position was put on as a hedge against possibility of higher USD interest rates doing damage to core short USD+long Commodity trades. Those core positions are now deep in the money whilst the ED spread is now slightly in the money (EDZ1 reval @ 99.40 when EDM1 was squared), from once being way out of money at worst of the Fukushima fears.
• Chart-wise, there is nothing special with EDZ1. No trade. EDZ1 short is maintained for hedging reasons as core book is still very much actively engaged short USD.
• EDZ1 probably a buy in the low 30s down to 25. 
• The only problem with unlegging is it increases my IMR used.

ED Calendar Spread : Update

• M1/Z1 spread has turned back up nicely from intra-day low of +11. Currently at +28.
• Still think this should trade in a range of between +25 to +50 although move to the upper band is data dependent and is far from assured. Any move above +37 will be difficult but remains my central scenario.
• EDM1 is basically stuck at 99.62 and will roll down (up price) towards 0.31% ceteris paribus. So the spread is very much an outright EDZ1 position.
• EDZ1 looks like in the early stages of a double top but clearly running out of time (expiry) to ever see the neckline again. Nevertheless, it is a sell if ever we get back to 99.40 (now at 99.335). That makes the spread a strong buy at around +22/+23.
• +36 and +41 are good levels to take profits.

ED Calendar Spread : Reduced @ +22

• Managed to ship in a large amount of this at +13 on the day 1 of the Fukushima nuclear disaster (PM Kan press conference).
• Now that I have cut loss on my equity hedges, naked core book risk seem a bit excessive.
• Thus squared half of the +EDM1/-EDZ1 spread at +22, even though I think this has a lot more upside potential.
• Some resistance here at +23. But if the US economy keeps showing continued growth (eg improving initial jobless claims, which to me, is the one that really matters), this should really be trading between +25 and +50.

3-mth EuroDollar Calendar Spread : +Jun11 vs -Dec11

• 3mth Libor = 0.31%; EDM1 = 0.38%; EDU1 = 0.43%; EDZ1 = 0.53%
• Rate rise priced in between Mar11 to Jun11 = 7 bp
• Rate rise priced in between Jun11 to Sep11 = 5 bp
• Rate rise priced in between Sep11 to Dec 11 = 10 bp (turn factor built in as well as Dec11 contract crosses year end, so actual rate rise priced in probably slight less)
• Spot - Sep11 = +12 bp
• Jun11 - Dec11 = +15 bp ie time decay on EDM1/EDZ1 spread for 3 months = 3 bp or 1 bp per month. Thats a miniscule price to pay for a long spread position. Almost a free option.
• Thus far, intra day, EDM1/EDZ1 has traded to a low of +11.5 on Tues 15Mar11 (day of Japan nuclear escalation and PM Kan news conference).
• Spread can easily trade to +25 on improving US data eg a few weeks of improving jobless claims (say <380k). My optimistic case scenario, +50 bp.
• Obviously, long here.
• Well and truly fuxxed though, if a credit freeze occurs and front end liquidity gets squeezed.

Core Book : Locking in

• Main Core Book naked positions shorting USD, long Commodities have delivered P&L at a pace and absolute amount way beyond my most optimistic expectations.
• As per rule #12 Substance Over Style (or pragmatism over elegance), even though chart trends are all firmly intact, I have tonight 1. taken profits on some more of the naked positions (GBP, CAD, Copper, S&P). 2. locked the balance of the naked positions into a spread against the EDM1/Z1 spread (at +25). Thus, am no longer running any unhedged risk in Core Book now.
• Average in-rate long EDM1/Z1 is now at +29.5. Think +25 should be good support. Do not see market pricing out a Fed hike for the rest of this year.
• Scenario 1 : Mid East/N Africa blows up : Gold, CAD profits, Rates losses.
• Scenario 2 : Easing of above fears : reverse, almost matched on both sides.
• Scenario 3 : US+global growth data continues strong. Jackpot.
• Scenario 4 : USD rally, Commodities collapse, US rates lower. Both sides die. What can cause this? Probably some kind of global deflationary event eg China crisis. Nightmare for me then but the locked in P&L should be more than sufficient buffer.

ED Calendar Spread : New Long M1/Z1 @ +38.5

• Follow up on yesterday's post on short rates and how the ED futures chart looks different from a few other currencies.
• Initiated a small +EDM1/-EDZ1 spread today on basis of weekly chart breaking +36.5, a previous high = trend change. The equivalent calendar spreads for the other 3 currencies are included here for easy comparison (AUD is flatter than EUR and GBP because RBA has tightened ahead of the rest).
• Will do more if we pull back lower.
• Ruing lack of focus in this. There was a time when this was at +11 where buying would have been almost like a free option.

EDU0/EDU1 Spread : Huge Move

• Yet another indicator reflecting less positive growth outlook going forward.
• Same story here with the others : EDU0/EDU1 spread sharp narrowing = pricing out of Fed hikes, driven by EU contagion fears.
• Trading now @ +73 which is where it settled on the night of the 1000 point Dow plunge.
• Watching those Risk Off trades very closely. Be ready to step up (ie more Risk Off) risk levels once they break.

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.

ED Spread : Over-riding Chart

• Golden opportunity earlier today when EDM0/EDZ0 spread narrowed to +32. At the time, EU fears hit near term high panic levels with EUR/USD touching low of 1.3143 vs current 1.3225.
• Doubled up on short ED spread position at +32.5 so average in-rate now at +36.
• In making the trade. had to summon up all of my 18 years Money Markets trading experience to over-ride chart reading and break trading rule not to average losers.
• Logic : EDM0/Z0 = amount of future rate hikes priced in between Jun10 and Dec10. With ZIRP in place, and the market NOT likely to price OUT higher Fed Funds later in the year, I would imagine that the absolute floor on the spread would be somewhere between 25-30 bp. Thus, in the low 30s, the spread appeared too cheap to me. Any change in Fed language will easily see this widen out to +50.
• Would appear that the market agrees with my above assessment, with the spread back to trading at +37, just a few hours later.
• Risk : Greece/Portugal contagion spills over into interbank market which freezes up and puts upward pressure on the very short end of the MM curve. Then EDM0 will sell off a lot more than EDZ0 and cause the spread to narrow.

• Price action appears to suggest that the EU contagion trade has run its course in the short term and spike bottoms have been formed almost everywhere. (Squared most of EUR/USD at 1.3155 earlier).
• Game plan now is to let Risk On trades run their course before going back to sell EUR again.

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).

ED Spread : Cut Loss at 103

• Just not happening. Cut loss at +103 tonight for a 4.5 tic loss.

ED Spread (U0/M1) : Fallen Off A Cliff

• This looks to be in free fall (or will be soon enough). Close below +99 this week = solid sell signal. There doesn't seem to be any nearby support, until we get to the 60-70 level.
• Well worth a big punt on this one, although we are only in the middle of the week and one needs to anticipate the end of week close now with 3 entire trading sessions to go. Usual dilemma - jump the gun or not ? Current market is 97-98.
• Ability for the spread to soften in the face of new highs in equities is a good sign.
• Working limit order to increase trade size here.
• Abort if we fail to close below 99 on Friday NY.

ED Spread : -EDU0/+EDM1 @ +98.5

• Had waited in vain to sell this above +110.
• Low traded +97.5 today. Significant chart supports at +102 and +99 broken/breaking.
• Sold @ +98.5, fresh position.

Eurodollar Calendar Spreads : Some Leg Work

• Traded EDM0/Z0 poorly previously. Gave up on a perfectly good trade for reasons not directly related to deterioration of the trade itself and never made the effort to get back in subsequently. [Needed to free up capital and reduce risk and chose the wrong trade to unwind]. Missed a huge move due to lack of tenacity.
• Move on to look at EDU0/M1 now. This time, promise myself not to lose focus.
• Weekly chart looks toppy. Would be ideal if I can get short above +110; stop above +122. Now at +102.

US Yield Curve : Strong Steepening Trend

Nice visual of what's going on in the interest rates markets currently.

• Short end : ED spread on narrowing course ie bullish price action here.
• EDM0/EDZ0 heading towards +58. Topped at +85.
  
• Downside (EDZ0 outright) contained by friendly Fed expectations, especially after surprisingly weak -85k NFP last Friday.

• Long end : US10YY on upswing.
• Target above 4.00% easily.
• Yield downside supported by debt supply/deficits (TYHo upside limited).
  

• 2s/10s spread in strong uptrend. Expect it to go beyond +300.
• Stop loss below +266 (vs current +286).

So, if bullish buy short end; if bearish sell long end. USD/fx support will likely not come from higher US rate expectations, but more likely from troubles abroad eg PIGS.

[Addendum 11Jan10 9:00 pm : So in hindsight, it was sensible to hedge the long USD exposures by going long Gold, Oil, CAD etc]

EuroDollar Spreads : Short

• 3mth Libor = 0.25% ; EDN0 (interpolated) = 0.73% => diff = +48 bp
• EDH0 = 0.33%; EDU0 = 0.97% => diff = +64 bp
  
• EDM0 = 0.59%; EDZ0 = 1.37% => diff = +78 bp
  
• EDU0 = 0.97%; EDH1 = 1.76% => diff = +79 bp
• Generally, charts of ED Spreads mostly showing a topping out process going on.
• Am short EDM0/EDZ0 spread at a poor +75. Still, comforting that chart parameters are becoming clearer with developing price action. +85 and +89.5 are good points to set trades against. Did not add on to +75 short on first trade up to +88 late last year (as per No Averaging Losers). However, would certainly consider doing this if we get another trade up towards +85. Always better to short AFTER a top is evident than to try to short it on the way up.
  
• Note the spot differential is at +48. Positive roll-down protection if fundamentals do not change too drastically from where they are currently.
• Selling EDH0/EDU0 might be a better trade than EDM0/EDZ0 but the former chart is a bit messy.
• This is a LTCM penny picking type trade. Will get killed if expectations for sharp Fed rate hikes take hold.
  

Hedge Long USD : Short ED Calendar Spread

• Idea behind trade 1st detailed here on 15Dec09. At the time, EDM0/Z0 was at +68 and EUR/USD was at 1.4533.
• Now, we are at +72 and 1.4272 respectively.
• As well as now day trading EUR/USD from the long side (take profits, reduce risks, re-establish shorts on rally, maintain core short), I think it is time to protect the long USD positions by building up short ED spread hedges.
• Have just started selling EDM0/Z0 at +72 today. Will scale in upwards from here. Technically, the spread should encounter resistance around the old NL at +77.
• Against current background of rising yields, be prepared to take some pain on this. [PS : Do not replace ED spread with TYH0 for the hedge]
  

Trade Idea : Short EUR/USD vs Short ED Spread

• Recent data confirms recovery (NFP, Retail Sales) and driven both US rate expectations and USD/fx higher. This has carried ED spreads wider.
• Accompanying chart is EDU0/EDH1 and EUR/USD over same time scale. Different chart structure. I want to be short of both charts technically. Overlapping fundamentals driving one chart higher (spread) and other chart lower (fx)
  
• Better economic news from here should push ED spread wider. Will use this as good opportunity to leg into a relative value trade ie Core -EUR/+USD (already in) vs Hedge -EDU0/+EDH1.
• EDU0/EDH1 spread has triple top around +80. If I can get set short in the mid +70s, that would offer very decent risk/reward. Stop out on a weekly close above +80.5.
• EUR/USD technicals here.
  
• Should outlook go horribly wrong (eg weak NFP next month), the ED spread should narrow and protect the long USD/fx position somewhat.
• ED spread = +ve carry albeit small. Partial offset to -ve carry on short EUR/USD.
  
• Constantly on the lookout for such setups (same fundamentals+different technicals+positive carry). Very hard to find. When one arises, seize it.
• Rush into the FX core trade; be very patient in setting up the hedge.

• [Addendum 16Dec09 12:44 am : On 2nd thoughts, better to stick to EDM0/EDZ0 instead of going out 3 months for a miniscule 3 bp extra. Both charts technically cool!]