interest rate trading..


Active member

A little removed from the index/equity based trading but just a quick question that some of you may be able to help with if you're feeling generous..

I'm interested in trading Interest Rate products, I've been looking at the bund for quite a few years as a speculative vehicle but I'm now considering gearing up my trading and ideally developing more risk averse trading strategies... i.e spreads.

Now, let's take the Euro curve..

I was wondering......

We have short-term IR products in the Euribor expiries, moving through to Govvy' bond products like Schatz, Bobl and Bund taking us from c.2yrs out to 10yrs....

What I'd like to concentrate on is anomolies on the curve, the best way I can think of looking at this is by 'drawing' a curve based on the rates implied by the Euribor, Schatz, Bobl and Bund. I'm a newcomer to this more structured way of trading (always having been a blood and guts breakout and range trader). Am I on the right track??

If I were to take for example the last traded price from each expiry and plot it (I can't do this from where I am at the moment as I don't have access to mkt. data unfortunately).

My tactics would be that assuming a curve *should* be relatively smooth as these are liquid contracts I would be able to see when either an expiry is out of line or curve change is taking place and make curve plays based on this ... i.e. if a spike were to develop in an expiry I would hit this and offset the risk with an offsetting trade in a nearby expiry or contract... The time frame is intraday as I am not well enough financed to take large pos's o/night...

Thanks in advance for any words of wisdom. I appreciate I need to look at this in more detail.. :confused:
I think that if you are trying to trade intraday then you should look to concentrate on a simple curve in a product like Euribor. You can trade the spreads as a defined product in these instruments which takes away the risk of trading outrights and getting stuffed on a leg.
I look at the curve everyday and see which way it is moving over last 10 or 20 days, it was flattening until FOMC and now it is steepening again. I do not really give a toss about that.
If you are trading intraday then you want to be trading the intraday spread volatility and not trying to take directional views. best thing to look for is how one spread moves against another such as Jun/Sep against Sep/Dec or how groups of spreads move against each other. Just as you would with outrights you can build flys, condors, combos and even more complex products with spreads.
Maybe you can look at something like the bund or US 30yr as a directional indicator, if either of those rally then so will Euribor and the front spreads will come off, backs go up.
Don't get too clever intraday it will screw you up. The clever analysis is for the position trades in illiquid markets.
twalker said:
You can trade the spreads as a defined product in these instruments which takes away the risk of trading outrights and getting stuffed on a leg.


Out of interest, with IR futures, does the situation often arise where you would consider legging in ? Or using market orders ? Or do you find that it's just not necessary to do this for these markets, and that trading the spread outright presents enough intraday opportunities ?

Most of the time the only reason to leg is if you have no chance in the spread product and you have enough volume in the outrights to make the risk of missing one side of the spread smaller. "Don't go legging" is a mantra I hear repeated over and over. Often you get away with it but if you have 100lots on an outright and some unscheduled announcement sends the market ballistic you can get seriusly screwed.
Hmm, it's a type of trading I've never made a success of. I tried calendar spreads for a while with Nukes (NQ) but found the legging in aspect just too much to handle with such a twitchy instrument. Had a spread product been available it might have been different, with seemingly predictable, if fast cycles.

Do you often get the opportunity to do much size on 1 trade with the IR spread products? Or is it generally lots of small transactions ?

Most of the time you can do a good volume. Although I am talking 1-200 not thousands. at 12.50/tick however that is more than enough risk for most people.
If you want to trade index spreads probably best to get an qutospreader that TT or Ecco have built into their trading platforms, it allows you to create derived products and will automatically trade legs for you. You can even set risk parameters incase 1 leg gets missed.