Go Long USD and ZN on ECB Rate Cut interest rate parity play?

Discussion in 'Trading' started by aeliodon, Sep 20, 2007.

  1. What do you think?

    I'm long ZN at 108'18

    Have sell order on E7 at 1.412 but i doubt I'll get a fill.
  2. Here's the way I see it...

    I see the bond selloff as a function of a letoff of the 'flight to quality' trade. This entire bond run was aided by recession uncertainty and fear of equities. With the 50bps cut in, no reason to hold bonds. The market feels the fed put. The bond / E7 play seems a roundabout way to do what you want to achieve, since these trades can trend hard against do to other factors than merely interest rate differentials.

    If you want to do a parity play, why don't you do it directly and play it via a EURIBOR/ Fed funds spread?

    Trade the three month euribor: EU3 (DTB exchange) is the contract. Go long the EU3 and go short the ZQ (fed funds).

    ZN and euro is a roundabout way. Although you -could- do a forex spread across the yr, ie short front month EUR contract, long the Sep08 contract -- a surprise change in interest rate spread will instantly change move that calendar futures spread. You can figure out the int. rate move the market is projecting on the longer dated futures by determining the cost of carry on those longer dated contracts against spot.
  3. dhpar


    i am not so sure. why is the sell-off more in the long end then? the rally was almost only in the short end...
  4. we went instantly from a market perceiving imminent recession, slowdown - implying less future inflation, thus supporting lower long bond yields. Then with aggressive FOMC support and dollar dumping, suddenly long term recession is out of the cards, since FOMC is on top of it. So now more future inflation is implied, and long bonds need to support it. (nominal rate - perceived inflation rate = real return) So when the FOMC changed policy, they changed the perceived future inflation rate, and the other variables needed to respond.

  5. dhpar


    yes - i agree with that.
    i thought you said before something like "bond selloff a function of a letoff of flight to quality trade" - not "a function of an increased inflation expectations".
    we are on the same page. cheers