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Thanks for a very informative post! I hope you wanted some questions because
I've got a number of them - see below.
Earl
-----Original Message-----
From: Timothy Morge <tmorge@xxxxxxxxxxxxxxx>
To: omega-list@xxxxxxxxxx <omega-list@xxxxxxxxxx>
Date: Monday, September 28, 1998 9:15 PM
Subject: Interest rate spreads--LONG POST!
>And to really take advantage of these trading opportunities, I had to learn
to
>trade what we called 'forwards,' and these are arrangements to buy a
currency
>for value spot and then sell it back at a future date at a price that is
figured
>by the interest rate differential between the two currencies and the number
of
>business days. And of course, if you had funding prior to a devaluation AND
you
I'd like to understand the mechanics a bit better. Is this done through a
forex broker or a futures broker? Is the long spot position essentially
funded with the short future? What kind of margin would be required and how
big would a trade need to be to avoid being gouged? How is the short
position guaranteed against default by a buyer who has seen his assets
devalued?
>play. Or another play. For example, how about one of Neal's favorites, the
NOB
>spread? If you think the Fed is going to lower rates, rather than just
being
>long bonds, you might instead choose to buy ten year note futures on the
CBOT
>and sell bond futures. The theory is again that if the Fed lowers rates,
the
>shorter the duration your exposure, the more it will benefit from this type
of
>change. The lingo here is that you would be putting on a spread to take
>advantage of a yield curve change, in this case the yield curve would be
>steepening [we are at a really flat yield curve right now...in fact, in the
past
>month, the ten years in relation to the bonds has been at an all-time
high].
So here we are looking at the very flat yield curve anchored at the long end
by the bond which has already discounted a rate cut and figure that the
shorter maturities would drop as they shortened in duration toward Fed
Funds? Hasn't a flat yield curve, such as we have now, already discounted
most of the rate cut at the short end and thus wouldn't current spread
prices have already discounted the profits to be made i.e. is this the kind
of trade which must be put on as flattening begins rather than the day
before a Fed meeting? Would it be unusual for the long bond to rise a bit in
yield even as the ten falls in yield?
Again to the mechanics: the spread is quoted and traded as a single symbol?
Are there any concerns regarding liquidity of certain spreads? Would one
look at a chart of the spread and analyze it technically in similar manner
to a single contract? If so, where does one obtain history of the actual
spread pricing as opposed to creating synthetic spread prices by netting the
contracts? An example?
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