+98.63% trading US short term interest rates higher

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Initial unit valuation 22 August 2016 $10,962, current valuation $21,775, if the Fed is right about the rate they set unit valuation will increase to  $40,329 on or before December 2019.

Performance

+98.63% current overall gain since 22 August 2016
Trade 1 = +77.26%, trade entry date 1 September 2016.
Trade 2 = +129.58%, entry 22 August 2016.
Trade 3 = +95.25%, entry 29 August 2016.
Trade 4 = +108.93%, entry 21 September 2016.

Fed’s meeting & rate hike schedule

The 10 minute video and spreadsheet linked below will show you how to track these trades marked-to-the-market and/or experiment with any potential outcome for these trades.

Click here to download the risk/reward spreadsheet, open it with excel, enable editing, then enable content, video instructions are embedded on the left of the spreadsheet.

What we know about the Fed’s intended rate hikes and the impact on these trades.

Fed’s median expectations are calling for 3.50% between December 2018 and December 2019

3.50% = 1.27% below the 60 year average for the Fed funds rate of 5.02%.

Source Federal Reserve

3.50% = 1.75% below the 5.25% we saw during the last tightening cycle.


Source Federal Reserve

Valuation for these trades at median Fed expectations

+267.88% overall net gain if rates rise to the Fed’s Median expectations over the next 22 to 46 months (Fed funds rate at 3.50%, 3 month deposit rates at 4.16%).

$10,962.50 initial deposit per trading unit
$29,366.67 net gain at median Fed expectations
$40,329.17 net liquidating value at median Fed expectations

Individual trades
Trade 1 = +200.36%, trade entry date 1 September 2016.
Trade 2 = +382.08%, entry 22 August 2016.
Trade 3 = +233.75%, entry 29 August 2016.
Trade 4 = +317.26%, entry 21 September 2016.

Lowest of the Fed rate hike expectations, 2.90% by December 2019

Valuation for these trades at the low end of Fed expectations

+157.66% overall net gain if rates rise to the lowest Fed expectations over the next 22 to 46 months (Fed Funds rate at 2.90%, 3-month deposit rates at 3.36%).

$10,962.50 initial deposit per trading unit
$17,283.33 net gain at median Fed expectations
$29,641.67 net liquidating value at median Fed expectations

Individual trades
Trade 1 = +138.99%, trade entry date 1 September 2016.
Trade 2 = +191.25%, entry 22 August 2016.
Trade 3 = +173.25, entry 29 August 2016.
Trade 4 = +150.60, entry 21 September 2016.

Net gain or loss for the individual trades through 8 March 2017

Trade 1,+77.26%

A) Entry date 1 September 2016
Original trade entry posted on Seeking Alpha 5 September 2016
Position: Short December 2019 delivery (GEZ19)
Entry price: 98.6150
Market’s anticipated 3 month rate by December 2019 = 1.3850%
Position value $3,462.50
Exchange margin requirement $510
I’ve allocated $3,462.50 to avoid any margin issues.
Each 0.01 move = $25.00 per contract
What the 3 month rate is and how it’s set
3 month interest rate futures contract specifications

B) Current 8 March 2017
Current GEZ19 contract price 97.5450
Market’s current anticipated rate by December 2019 = 2.4550%
Current $3,462.50 allocation valuation = $6,137.50 +77.26%%

Current chart to monitor this trade forward. We’re looking for the price of the contract to fall from 97.5450 to 96.60 or lower between now and December 2019 as 3 month deposit rates rise, each 0.01 = $25.00


Trade 2, +129.58%

A)Trade entry date 22 August 2016
Original trade entry posted on Seeking Alpha 5 September 2016
Long June 2017 (GEM17) 98.7500
Short December 2018 (GEZ18) 98.8200
We’re anticipating the GEM17 GEZ18 spread to widen from 0.1250
Position value $312.50
I’ve allocated $1,500.00 to avoid margin issues and have the option to add positions should the spread price decrease.
Each 0.01 change $25.00
Exchange margin requirement $470
Our front month hedge has been rolled from March to June 2017

B) Current 8 March 2017
Long June 2017 (GEM17) 98.7500 current price 98.6950
Short December 2018 (GEZ18) current price 97.9900
Current Spread 0.8500
Current $1,500 allocation valuation = $3,443.75 +129.58%

Current chart to monitor this trade forward, we’re looking for the spread to increase as the December 2018 (GEZ18) contact price falls to reflect the increase in 3 month deposit rates, each 0.01 = $25.00

Trade 3, +95.25%

A)Trade entry date 29 August 2016
Original trade entry posted on Seeking Alpha 5 September 2016
Long June 2017 (GEM17) 98.7500
Short December 2020 (GEZ20) 98.5050
We’re anticipating the GEM17 GEZ20 spread to widen from 0.2450
Position value $612.50
I’ve allocated $2,500.00 to avoid margin issues and have the option to add positions should the spread price decrease.
Each 0.01 change = $25.00
Exchange margin requirement $525
Our front month hedge has been rolled from March to June 2017

B) Current 8 March 2017
Long June 2017 (GEM17) current price 98.6950
Short December 2020 (GEZ20) current price 97.3700
Current Spread 1.38
Current $2,500 allocation valuation = $4,881.25 +95.25%.

Current Chart to monitor this trade forward, we’re looking for the spread to increase as the December 2020 (GEZ20) contact falls in price to reflect the increase in 3 month deposit rates, each 0.01 = $25.00

Trade 4, +108.93%

A) Entry date: 21 September 2016
Original trade entry posted on Seeking Alpha 21 September 2016
Position: Short December 2018 Fed Funds (ZQZ18)
Entry price: 99.1650
Market’s anticipated Fed Funds rate by December 2018 = 0.8350%
Position value = $3,480.00
Exchange margin requirement = $710
I’ve allocated $3,500 to avoid any margin issues
Each 0.01 move = $41.67 per contract
What the Fed Funds rate is and how it’s set
Fed Funds contract Specifications

B) 8 March 2017
Short December 2018 ZQZ18 current price 98.3700
Market’s current anticipated rate by December 2018 = 1.6300%
Allocation value = $7,312.50, +108.93%

Current chart to monitor this trade moving forward. We’re expecting the Fed funds (ZQZ18) contract price to fall to 97.90 or lower between now and December 2018 as the Fed Funds rate rises, each 0.01 = $41.67.

Good or bad we’ll continue to provide performance updates going into and potentially after every Fed FOMC meeting or these trades are offset.

Previous SA posts for these trades

13 January 2017 Trading U.S. Rates Higher, Performance And Position Update (+80.16%)

Initial trades posted on SA 5 September 2016 and 21 September 2016

Previous SA reports focusing on rates

14 July 2016 Fundamentals That Will Impact All Our Portfolios, Domestic And Internationally

10 November 2015 The Only Solution To The U.S. Treasury’s Debt Crisis

5 November 2015 A Strategy To Deal With Rate Hikes Over The Next 36 Months

Reports on deck for Seeking Alpha

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  • Defined risk trading strategies for capturing major moves
  • U.S. economic reports fact or fiction
  • Trading the coming trade wars
  • Capturing the inevitable major market moves in the U.S. dollar
  • Trading gold using automated trading strategies
  • Generating income writing credit spreads in energy markets
  • Understanding changes in implied volatility
  • The risks and rewards of trading vertical credit spreads, short butterflies, short condors, ratio call back spreads and ratio put back spreads as implied volatility spikes before earnings announcements.

Disclosure: I’ve been a professional trader and run a family office from Tortola, British Virgin Islands for the past 20+ years, zero income, corporate, sales and inheritance tax and would like to keep it that way. Because of the potential tax implications I do not manage U.S. accounts or sell advisory services to U.S. clients. I do however manage funds for qualified non-U.S. investors and entities. I may at times for my own accounts or for the accounts I manage have positions on that could be contrary to the ones mentioned in my reports, additional disclosure.

Published by

Peter Knight Advisor

Family Office, Advisor

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