[Trade F15, March 29, 2016] I’ve been eying getting short for the Dec meeting for a while now, because that is my #1 candidate for a hike this year. This should trade bearishly. I think this is a reasonable look:
Buy EDU6-Z6 spread vs Sell 2x FFV6-X6 @ 3 (settle)
Note that this is 100 ED spreads for every 120 FF spreads. 3s were the only trade in FFV-X yesterday, and there is 50+K on the 9 offer in EDU-Z. A while back, I said we should fade the Nov meeting and it went almost to zero. Well, it’s back near 3. It’s hard to see any meeting in this environment being as a “slam dunk” hike. So I think the election could be a good excuse to take a pass on a hike in November. And I like December to pick up all the disappointment. Reasons to do the trade:
- This is strangely back near the recent lows. Any bearish trade that still does well at the Feb highs is an attractive one.
- You are paying only 3bps. The term structure of libor could be worth 1 bp, and the Dec turn (3 days) could be worth 1 bp. So the net cost to me is more like 1bp for this sexy profile…
- I like being short for the Dec and Jan meetings. The profile is what I am looking for – net short 0.17 meetings, with being short for Dec and Jan vs being long for Nov. If they hike in Sept, Nov could go to zero.
[This was sent to clients on March 29, 2016. Profit was taken on April 20.]