eurofliesParticipantSeptember 15, 2016 at 11:06 amPost count: 6
I’ve been trading eurodollars for a decade and half but these recent ranges must be amongst the tightest ever. As a few examples on a one month lookback, 3m spreads excluding the first couple have a range of 1.5-2 ticks through the golds, 12m spreads excluding the first couple have ranges from 5.5-7 through the golds.
Zero interest rates weren’t an issue when there was a curve to trade but now it’s gotten so tight that I have to wonder if it’ll ever expand again to more tradeable ranges. There should be enough vol to have range expansion w/US election, another hike on tap, LIBOR money market issues, stocks near highs, post Brexit, etc…. but if we can’t get the ranges to expand w/all this going on, it’s tough to think of a situation where it will.
Even a couple years ago before Bill Gross left PIMCO, 12m spreads were regularly over 100 and now they’re priced in the mid to low teens!
Curve AdvisorKeymasterSeptember 15, 2016 at 7:13 pmPost count: 612
Yes – the spreads are crazy tight. But you have to factor in that some people think the “neutral” rate is only like 1%. Also, we have some central banks engaged in QE. And we have a bunch of other factors I listed in my “elephant” article: http://www.curveadvisor.com/2016/03/the-elephant-in-the-investing-room/. So in that type of environment, it’s really hard for longer term rates to be very high. In fact, even at 1.70, US tens could be considered cheap relative to other rates.
I think we could get a big catalyst in a few years, as the baby boomer generation turn from being net investors to net consumers – but that could be considered far away. I’m not sure if the election matters that much – I mentioned last week in the newsletter that Obama has been engaged in his own “fiscal stimulus” with all the additional spending during his administration, but that has not mattered to the long end bulls. If you chart the increase in the US debt to rates, there is actually an inverse correlation in the past 8 years. A hike could end up flattening the curve, libor widening may be considered a short term phenomenon. In the short term, we have the BOJ perceived as trying to steepen the curve, but that could revert after the meeting next week. So I’m not sure what the catalyst for a big selloff will be.
I’m a big believer in adjusting your trading style to the environment. If you are used to trading 6mo spreads (which barely trade), consider trading a smaller amount of 1 year spreads, to get more volatility. For example, if you want to buy EDZ7-M7 spread, try trading a smaller amount of EDU7-U8 instead. You just have to be a little careful for signs of a regime change. Or even better, try and find some new things to look at. The more things you can look at, the more opportunities for profit you will have.
eurofliesParticipantSeptember 16, 2016 at 10:50 amPost count: 6
I’ll agree that we have to trade the market we have rather than the one we want and instances like this require more discipline, intense focus on order book placement and using more ratios to try and make up for the lack of 1:1 ranges.
6m spreads have been my focus but now I’ve started to get into 9m spreads which are trading much more than they used to, however the exchange defined fly markets are completely barren in 9m flies. An end user traded some 9m flies via block trades in the days leading up to the last employment report so there is some additional focus there. Since it’s not a problem to recreate any fly via other spreads, it’s perhaps a good thing to play in the 9m space.
Not sure I’d ever say that I missed Bill Gross but this paper was interesting if you didn’t see it in recent weeks about how he was 10+% of the eurodollar market.
Curve AdvisorKeymasterSeptember 18, 2016 at 4:35 pmPost count: 612
Thanks for sharing that article. I remember that time well. His constant buying of ED futures was driving some fly structures to extreme levels, which was getting uncomfortable. When he exited, a lot of our trades made a ton of money. I suppose most of the time, fly traders are generally taking the other side of “large speculator” trades. Everyone piles into something, distorting the curve and then when they want to get out, the curve distortion ends and we profit.
I’m not sure what you mean by “order book placement and using more ratios to try and make up for the lack of 1:1 ranges.”
I think there could be some value in trading something that others aren’t looking at. It looks like the 9mo spread market is reasonably tight, but they don’t look like they feed into the fly prices. I notice the CME does not feed through prices of some structures into other structures – even if it makes logical sense. For example, the single fly legs don’t feed into double fly prices. The main reason I don’t like 9mo spreads is because you have to keep on top of the year-end turn in the Z contracts. You never want to have a large position in a Z contract, only to find that the turn pricing changed. I suppose the turn has been fairly stable in recent years though. But you have to make an adjustment to every spread, so it takes a little more discipline to compare one spread to another. I’m not saying it’s difficult to do – just that it can be tedious in fast markets.
All the year spreads are turn-neutral, and the period covers 1 year so the prices are easier to interpret. Also, I think with the flatter curve, getting more juice in a trade could be better. I have found the tighter trading ranges on many structures very profitable. However, you always have to be cognizant that the trading regime could change, and understand when that regime change could occur. And when it does, you adapt to that. But being able to adjust to different markets really helps with profitability.
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