Long Term Trade - rising US Interest rates

Martinghoul said:
Well, that's the thing exactly... Does anyone expect these rate rises next year? 'Cause that's about as far as you can go with Eurodollar options... If you have big balls (like Cap'n Arab), you should do outright, but these games ain't for yours truly.
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modelling them sure as sh1t ain't easy.....
 
A couple of years ago I heard something about the CME listing ED options having strikes > 100... don't know if any traded though.

How far ahead are you talking? I woud think a pack or bundle (forward starting?) would be better for this, say H5Z5 or summit.However you go about it, I'd do it w/ minimal leverage. Just have it as something you can stick in your bottom drawer, as they say.

all IMHO

EDIT: You could also look at options on IRX
 
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Someone definitely crossed a monkey above 100 when they first came out, I remember that.
 
First of all - many thanks for all of the replies so far. Some good stuff here in an area I know very little about.

I see not that I should have specified how far forward, especially as contracts expire & have rollover costs.

I am looking towards interest rates being moved from 0.185% to 5% within the next 5 years.

This is of course, something for the bottom drawer but it does rather represent an interesting gain, percentage wise.
 
DionysusToast said:
First of all - many thanks for all of the replies so far. Some good stuff here in an area I know very little about.

I see not that I should have specified how far forward, especially as contracts expire & have rollover costs.

I am looking towards interest rates being moved from 0.185% to 5% within the next 5 years.

This is of course, something for the bottom drawer but it does rather represent an interesting gain, percentage wise.
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If you're looking for that I'm afraid I cannot think of a sensible risk/reward trade. I can give you something pinpointing 5% relatively easily but it really doesn't make sense to do it. As meany says, it's top picking at its worst...
 
Your prediction might be in line with what the market is looking for. As such, you might not make any money even if you are exactly right.

For example, how would one go about hedging a UK tracker mortgage, which is linked to base+x.

Short sterling is pricing in interest rate hikes - I don't believe it's possible to hedge the BoE base rate but if anyone knows differently please let me know.
 
well Z5 is pricing in 3.3% ish, which is nearer the 5% target than the supposed 0% stop.
 
meanreversion said:
Short sterling is pricing in interest rate hikes - I don't believe it's possible to hedge the BoE base rate but if anyone knows differently please let me know.
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You can do it on an unleveraged basis by depositing in a base rate tracker at various building societies.

Not really a hedge tho.
 
meanreversion said:
The base rate is unhedgeable I think because it is an overnight rate only, and nothing else.
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I think some banks are back in the mkt offering base rate derivatives to their institutional clients, so it's hedgeable in theory, but not in practice. The best you can do in the mkt is SONIA swaps, which are the closest you can get to base rate.

As to your query, DT, I think the only/best way you can do this is by owning some far OTM puts on one of the UST futures contracts, such as FV. For example, the furthest strike I see that has a price in Dec10 FV is 117, which, if it expires ITM, would imply 5y note yielding arnd 2% at delivery. This put costs a tick (1/64th), i.e. $15.62 per contract, but you'll have to keep rolling it. Let's say the event that you're looking for occurs suddenly in, say, 2.5 years. By that time you would have paid a cumulative premium of roughly $156.2. If 5y notes then trade at 5% yield, your put would be worth arnd 13-38+, i.e. arnd $13.6k.

This is a very rough calculation that makes a variety of arbitrary assumptions and ignores other important aspects of pricing.
 
Martinghoul said:
I think some banks are back in the mkt offering base rate derivatives to their institutional clients, so it's hedgeable in theory, but not in practice. The best you can do in the mkt is SONIA swaps, which are the closest you can get to base rate.

As to your query, DT, I think the only/best way you can do this is by owning some far OTM puts on one of the UST futures contracts, such as FV. For example, the furthest strike I see that has a price in Dec10 FV is 117, which, if it expires ITM, would imply 5y note yielding arnd 2% at delivery. This put costs a tick (1/64th), i.e. $15.62 per contract, but you'll have to keep rolling it. Let's say the event that you're looking for occurs suddenly in, say, 2.5 years. By that time you would have paid a cumulative premium of roughly $156.2. If 5y notes then trade at 5% yield, your put would be worth arnd 13-38+, i.e. arnd $13.6k.

This is a very rough calculation that makes a variety of arbitrary assumptions and ignores other important aspects of pricing.
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Uh oh I think I know who the brainiest punter on t2w is now. Run away!!
 
arabianights said:
But the building societies promise to track the base rate for you :)
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Yeeesss, I wondered how they did that. Obviously they can borrow overnight from Mervyn at base, but how do they lend for 25 years at base+x, unless either a) there is a way of hedging it or b) they are unhedged because c) if it goes t1ts up, they get bailed out anyway.
 
meanreversion said:
Yeeesss, I wondered how they did that. Obviously they can borrow overnight from Mervyn at base, but how do they lend for 25 years at base+x, unless either a) there is a way of hedging it or b) they are unhedged because c) if it goes t1ts up, they get bailed out anyway.
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Nah, they hedge... If not by doing base rate swaps, then through SONIA swaps. Normally the actual duration of their liabilities is arnd 3 - 5yrs, so they used to show up in the short sterling mkt periodically in the past.

And P.S.: I am not brainy, I've just been doing this here sh1te for a while now, is all.
 
DionysusToast said:
I am looking towards interest rates being moved from 0.185% to 5% within the next 5 years.
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I am not saying that you are wrong, but why do you think that interest rates are going to be at (or around) 5% in five years? America's economy didn't really survive this recession on their own - its 'survival' was financed completely by debt. Sooner or later, this debt will have to be paid off. When the central bank starts to tighten monetary policy by increasing interest rates and/or withdrawing money from the economy, I really don't think American's will be able to survive on their own. So who comes to the rescue? The U.S. government, of course! How? By pumping more money into the economy and/or putting interest rates lower.

It does make sense that interest rates should start to increase hereon, but since America's economy is not fundamentally strong enough to sustain a hike in interest rates, eventually, interest rates will start to decrease again and you could get chopped out.

Also, don't get forget the European nation's debt problems are far from over...at the moment, no one is thinking about them because of all the great economic data we've been having. What isn't obvious is that all this great economic data is a direct consequence of all the QE performed by the U.S. government - not because the U.S. economy is strong enough to stand on its own two feet.

Just my two cents :)
 
I hear you Amit. We all have opinions on where markets will go. I just happen to think interest rates will be at 5% in 5 years. I do not think that the US will follow Japan. I've lived in both the US & Japan and Japan has a lot of cultural baggage that holds it back economically. The US does not have this and therefore is much more flexible.

I'm going to stick by my guns on that part as I only trade off my own opinions and not other people's. If a trade fails, it's my fault. If it works out, it's my fault.

RIght now, I'm not even sure if there is a way to trade it !
 
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