Project Description

[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…
  • 160328 EDU6-Z6 vs FFV-X tableI 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.]