zq (fed funds) spreads

Here's a new trade for post hyperinflation 50bp cut environment.
I'm on the fence as to how much I want to go in on this so I'm starting small (err.. notice me on the ask at .18) -- so maybe those who are interested should discuss this. It has a decent risk/reward, I believe:

Long October ZQ 07, Short November ZQ 07.

The spread is at 18bp right now. (so sell 18 cents of actually -zq oct, +zq nov 07)

My thought is max risk is realistically 7bp, a 25bp width between the two months [market factoring a fed cut in november after october month]. Assumption is this shouldn't widen unless there's a run on our banks.

Price target is 0 most optimistically. The trade is done on the assumption credit markets further stabilize, inflation upticks and makes it difficult for the market to perceive more near term cuts.

7:18 risk reward ... Likelyhood of success guys? I'm selling it. Notice how it ticked down from 20c to 18c after settling down after the FOMC today.. Does this slight price move predicate a more bullish [thus requiring less cuts] market?
 

Attachments

The spread is trading at .195-.20 right now. Great opportunity to short with .05 (or .05 x 4167 per spread) risk if you perceive maximum possibility of fomc rate cut is .25 between oct and nov.
 
I cut most of this trade today at .15 ahead of the jobs report. Have a little left, but I anticipate the spread blowing back to 20c+ if the jobs report is anything less than stellar. I'll reload then.

This is a higher risk hold overnight -- you might as well go directional the short end here with your prediction.

The reward is certainly there though. If the jobs # is great, then I anticipate this moving to 10c or so...

Holding one for the gamble.
(had 8 on before)
 
Well cut it early. Now the spread is at .09. Gave up $1500 ... thats ok, my bond shorts are making up for it.

Regardless, I'm happy I have the right interpretation on the psychology trading this spread. Will make many good future trades.
 
Time to enter this trade again. Trading right now at .22-.225.

Market is factoring in 25bp cut on Oct 31 almost 90% odds. I don't buy it. Sell it. Risk of 3bp and upside of 22bp..

With crude at 88, wheat at 8.55, gold at 770, eur at 1.43 who thinks another fed cut is even possible so soon?? Maybe Bill Gross and PIMCO, to save the housing mkt. I'll gladly take the other side of that trade.

The only way the long bond and 10yr goes much higher from here (thus lower mortgage rates) is if the flight to quality continues, which occurs if the stock market crashes. The question: are people going to be in a mood to buy houses when their 401k accounts are nil?
 
Quote from Kevin Schmit:

Thanks. Got it in. You've been pretty accurate on these
spreads.
More...

Thanks. I've done these with much better success than my equities trading ... maybe the probability framework being much clearer to define makes it a simpler (easier?) trade. Very 'binary' so to speak.

At this point, the October leg is not really necessary. Just go short Nov directly. Since Oct goes off the board soon and even a credit crisis starting tonight could barely budge it (since Oct expires at avg of actual traded fed funds rate). But its useful to keep looking at the spread just for the sake of determining what the market considers probable.

This FF spread is highly correlating to bond buying and equity selling. Funny how nothing fundamentally changed this last week - we all knew the economy the was slowing and under pressure. Just a few earnings reports and some flashy Mkt crash anniversary headlines, and you get a move in these fed funds. Amazing.

Turn on the talking heads on Bloomberg and CNBC and ten days amidst equity market euphoria every 'expert' is expecting the fed does nothing, now most are expecting a cut. Looks like people really think this is about the level of the S&P.

What has changed in 10 days besides the level of the S&P [that will affect FOMC policy]? The only thing I can think of is that inflationary pressures are up. Oil and gold much higher.

And when I see news clippings like this, this morning, I get a little more conviction:

Today 06:30am
EUR/USD Fed's Mishkin says states high oil shows inflation "shocks" can persist; Hints Core CPI may not be realistic
-Mishkin stated late Saturday that the Fed bases its rate decisions "on core inflation" but stated "It clearly does not make sense to pretend that people do not eat or drive" incinuating that the core CPI (which is smoothed and backs out food and energy costs) is not indicative of real prices.
-Mishkin also states that tightening in response to high energy would be bad policy.
 
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