I never traded this so I want to know if I'm reading this right. looking at the Nov contract at 97.84, you get 16 basis points($666 per contract) if the fed stays pat and you lose 9 basis points $374 if they hike somewhere along the way. So you are essentially getting 2-1 on no hike(you might make more if they ease, or lose more if they hike more but lets leave that out for now). Did I got it right?
1) If the rate remains steady, you should collect the "discount". 2) If the Fed eases, you should earn atleast 25 points more. 3) If they tighten 25 OR MORE, be careful.
The "fed funds rate" you hear about on the news is a "target" rate. Even though the "target" rate may stay the same, the actual rates my vary. The fed funds futures settle against the actual rates. There is another thread on ET that describes these quite well.
filled long NOV 08 ZQ at 97.84 -fed doesnt hike with increasing unemployment, falling business confidence http://www.contraryinvestor.com/2008archives/mojuly08.htm -its unlikely they will start a volcker, specially now with commodities taking a beating -its possible that financial firms are distorting fed funds futures market apart from its true value in an attempt to hedge against a hike -I'm still short financials so in case they hike and I lose money, financials will take it on the chin -pimco is saying no hikes this year, they make mistakes on the extend of moves but rarely on direction -getting almost 2-1 seems like easy money
yeah I feel like something fishy is going on and I'm wrong. thats why I needed the 2-1. got filled on the bid, wouldn't chase this. also choose nov because the market is probably right but maybe a bit too early
Here's the key: In today's article I am going to discuss a simple and easy way to estimate a fair value for the all important FED FUNDS rate and to gauge the likely path of upcoming changes to that rate. The FED FUNDS rate drives investor and trader behavior, market sentiment and valuations. It's also a key determinant to measure the level and shape of the so-called risk free yield curve. The FED's monthly interest rate decisions are widely followed, and for good reason, by both active traders and longer term investors. Accurately predicting changes in the FED FUNDS rate can give you a real advantage in the markets and hopefully lead to excess returns. The US Federal Reserve, the nation's arbiter of the Fed Funds rate, has a dual mandate. Indeed the The Federal Reserve Act gives the FOMC a dual directive - to pursue maximum sustainable employment and price stability. These objectives are specifically mentioned in SECTION 2A - Monetary Policy Objectives of The Federal Reserve Act. The Federal Open Market Committee (herein refereed to as FOMC) has changed the Fed Funds rate eight separate times since September 17, 2007 including a dramatic inter meeting rate cut on January 22, 2008. The last cut, a 25 bp reduction of the rate on April 30th, brought the cumulative amount of easing from the FED to whopping 325 bp so far during this cycle. After such a spectacular change of interest rates, it's reasonable for investors and active traders to question whether the next FOMC move will be a further reduction in rates or as the bond markets seem to imply, a hike in rates. By no means is this an easy ................... http://www.tradingmarkets.com/.site/stocks/commentary/editorialarticles/-77034.cfm H!L!J!
this thing started well "The most visible change was removing the part of the June statement that downside risks had diminished somewhat. That is an acknowledgement of what has been going on in the credit markets. There was a subtle downgrade in growth prospects.'' http://www.bloomberg.com/apps/news?pid=20601087&sid=ahNaox8g5N.8&refer=home Looks like the fed will just keep talking to keep TIPS from rallying and the 10y from nosediving. I think about this trade and it seems like a mirage, market was laying almost 2-1 that the fed will raise right before the election, plus all the other factors... its gotta be scared financial firms