yogi stonks@YogiStonks
Sep 23, 2022
7 tweets
SandyLyle@SandyLyle15
Sep 23 22
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As a passive learner on this forum, can someone--besides Kitty--explain how this trade would've worked? Welp, I missed out, but everyone profited nicely, and, as stated below/before, you--Kitty--are the GOAT and "King of the Curve"!
Yes! So, back in mid-June, the equity market was at similar lows to where we are now, and due to the past 20+ years of accommodative fed policy, there was a narrative that the fed wouldn't allow the market to drop further, and would have to ease off rate hikes/cut rates... 1/n
Kitty, and a small handful of others, correctly predicted that 'this time it's different' because of the underlying inflation spiraling out of control. i.e. that rates would need to stay higher for longer... 2/n
Now market has the opinion, rates will go up then quickly be reversed back down. We have an opinion that they will go up and stay there. How do we actually trade this... 3/n
This is where the Eurodollar(ED) futures come in. These futures settle based on the future interest rates. Theres a lot of detail about how precisely they are calculated (using LIBOR), and how we will move to using SFR futures soon instead, read more here cmegroup.com/markets/intere…
Skipping the details, these things are priced like 100-x% where x is the interest rate. So picture 1 is the implied rate curve, picture 2 shows the ED futures curve (it's inverted, but no problem):
A few months ago, the ED curve looked like this, with a 87bp implied rate cut between dec 2022 (EDZ2), and dec 2023(EDZ3). Remember: we think that there should be almost 0 cuts between Z2, and Z3. SO we buy the EDZ22, and sell the EDZ23, (known as the EDZ2EDZ3) spread...
Here is how the curve has moved (pic 1) and how the spread itself has performed (pic 2)
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