The Epic American Credit and Bond Bubble Laboratory Message Board

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory

Public Reply Prvt Reply Mark as Last Read File

Previous 10 Next 10 Previous Next

To: russwinter who wrote (28611)	3/15/2005 12:17:40 AM
From: mishedlo	Read Replies (2) of 110194

If we took the one I'm toying with, the Sept ED, it's trading about 96.10. It matures on Sept.19, so in effect the market thinks ED yields at that date will be 3.90%. Right now the March ED going off (on 3/21) are at 3.03%. So effectively the market has already priced in 87 bps of higher rates between the next meeting on 3/22 and 9/20. That is sort of correct and sort of incorrect. Remember that the ED contract looks 3 months ahead. Let's start with March at 3%. The FF rate is currently 2.5% so why is that at 3%? Because the ED is for a 3 month lending period and the average price that someone wants today for that 3 month loan (looking forward 3 months from March) is 3% Fast forward to Septemeber. It is very hard to say right now, looking forward from September what hikes the market might think will be occurring looking 3 months forward from that date. I sure wish ED futures were based on the FF rate at the close but they are 3 months forward looking from a future that is already looking forward (if that makes any sense). Thus even if there is one less hike than expected between now and SEPT, that does not necessarily mean one will profit. If the market thinks the FED will get aggressive later this year one could be right and still lose money. That said, the odds are very high (especially if the FED pauses earlier rather than later) of this trade being a winner. In fact, the only probable way to lose on a pause is if it is the last one in the series but the FED warns of bigger hikes coming if necessary. I am pretty sure you are aware of all of this, but it might not be clear to others and it sure can be confusing. Comments? Mish

Report TOU Violation

Share This Post

Public Reply Prvt Reply Mark as Last Read File

Previous 10 Next 10 Previous Next