If you think trading rates is boring and offers no opportunity for profit or loss think again, the trade I’m reviewing in this report walks you through an interest rate position that recently appreciated from $4,500.00 on the 6th of September 2018 to $10,750.00 by the 8th of October 2018 or +138.89% during this 32 day period.
The duration for the chart above is from the 3rd January 2018 to the 3rd December 2018
The price on the chart represents what the market thought the change in rates would be between two delivery months March 2019 and December 2020.
For example, on the 6th of September 2018 the price was 0.1800 what this reflects is the market was pricing in an increase in rates between March 2019 and December 2020 of +0.1800%, each 0.01 = $250.00 giving this position a value of $4,500.00.
By the 8th of October 2018 the market’s perception of what rates would do between March 2019 and December 2020 had changed to +0.4300 position value = $10,750.00
0.1800%, position value $4,500.00 6th of September 2018
0.4300%, position value $10,750.00 8th of October 2018
Appreciation of the position $6,250.00 or 138.89%
What we’re trading to capture this move is the world’s most liquid derivatives contact the total face value of all outstanding positions currently exceeds 17 Trillion US Dollars. To put this into proper the US’s total Federal debt is 21.5 trillion
3 month rates or Eurodollar deposits, are time deposits denominated in U.S. dollars at banks outside the United States. (There is no connection with the euro currency or the Eurozone).
A Eurodollar futures contact reflect what the market believes 3 months rates will be during the contract delivery month, for example looking at the price of the March 2019 of 97.140 it telling us the market believes the 3 month rate will be 2.860% during March 2019. To calculate the rate the contact price represents take 100.000 – the contract price in this example 97.140 = 2.860 representing a rate of 2.860%
Now lets do the December 2020 delivery
In this example the market is expecting a change in rate between March 2019 and December 2020 of 0.125% versus the Fed’s expectation for a change in rates disclosed at the last Fed post meeting press conference of 1.00% during the same period.
The type is trade we enter to participate in this move is called a spread.
Let’s walk through two example the first establishing a position to profit from an increase in rates the second a decrease in rates.
We both we need to first calculate the rate expectations between delivery months, in this example I’m using March 2019 and December 2020.
Then pull up your spread chart
To trade rate expectations higher
3) How to trade rate expectations higher between March 2018 and December 2020, current 0.1450% back to where they were trading 3 weeks ago at 0.35%.
4) If rate expectations return to 0.3500% where they were trading 9th of November 2018
Position value = $8,750.00
Gross profit = $5,188.00
Margin requirement = $2,300
Recommended deposit $10,000
Gross return per unit = 51.88%
To “blowout” rate hike expectations would have to fall from an increase of +0.1450% to decrease in rate of -21.30%.
Current 1 year chart each 0.01 = +250.00
If you’d like to track other position in the 3 month rate s see this link
If you decide to become our client I’ll share additional strategies in the Global Rate markets with a higher return on risk
5) Rate markets we trade
6) How likely is it that the Fed will decrease rates between March 2019 and December 2020?
Since November 2015 the Fed has told us at every Fed meeting they will raise the Fed Funds rate to a minimum 3.25% and as high as 3.75% by December 2020. For confirmation see the Fed’s website
7) Fed Chair Powell told us at the last Fed press conference 26 September 2018
“The US Economy is strong”
“Growth is running at a healthy clip”
“Unemployment is low”
“The number of people working is rising steadily”
“Wages are up ”
“Inflation is low and stable”
“All of these are very good signs”
8) Most importantly he reiterated where the Fed sees rates and when
Current = 2.15%
Dec 2108 = 2.40%
Dec 2019 = 3.40%
9) Fed’s press conference (5:00 minutes, rate expectations 4 minute in)
10) Is 3.40% high by historical standards?
At 3.40% the Fed Funds rate would still be 3.21% below the 1968-2007 per-financial crisis average of 6.61%.
|Period||Fed Funds||3 Month||CPI||Rate – CPI|
|Pre/Post + –||-5.86%||–5.31%||-2.66%||-2.65%|
11) Interest Rate Futures/Options Educational Videos and Resources
11.3) Eurodollar Interest Rate Futures Contracts
11.4) Eurodollar Futures Pricing And The Forward Rate Market
11.5) How to Trade Eurodollar Spreads
11.6) Fed Fund Futures contracts
11.7) Understanding IMM Price and Date
11.8) Understanding Eurodollar Strips
11.9) What is the Eurodollar Settlement Process?
11.10) Treasury Futures Contracts
11.11) Calculating U.S. Treasury Pricing
11.12) Treasury Intermarket Spreads – The Yield Curve
11.13) Trading the U.S. Treasury Curve: Two versus Ten
11.14) How Can You Measure Risk in Treasuries?
11.15) Treasuries Hedging and Risk Management
11.16) The Basics of Treasuries Basis
11.17) Treasuries Delivery Process
11.18) The Importance of Basis Point Value (BPV)
11.19) Understanding Packs and Bundles
11.20) Understanding Convexity Bias
11.21) Understanding the FOMC Report
11.22) Get to know Treasuries Cheapest To Deliver (CTD)
11.23) Trading the Link Between USD/JPY and U.S. Treasuries
Rates have been artificially low far too long. The US now needs raise record amounts of money to continue to finance their reckless deficit spending.
In order to do this the US will have to offer purchasers of their debt a positive
rate of return consistent with, or higher than the historical average of +1.47% above inflation, rather -0.25% below (negative rate of return). This is assuming you believe the official inflation rate , most economists that do not work for the Fed or US Government don’t
1968-2007 historical averages versus post 2008-2018
|Period||Fed Funds||3 Month||CPI||Return|
|Pre/Post + –||-5.86%||-5.31%||-2.66%||–2.65%|
13.2) Exchanges we trade on
13.3) Brokerage firms
13.4) What an ATA is and how they work
13.5) Fee structure
13.6) How to define overall risk on your account
13.7) How balances are protected
13.8) Open An Account
Peter Knight Advisor