rkpat
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| Total Posts: 37 |
| Joined: Feb 2011 |
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Im still trying to get a clear understanding on bank of england reserve operations etc..to understand how low libor can go.
Currently BoE pay 0.5% on all reserves of banks. I don't know why to be honest. They should just pay 0.5% upto a certain amount (which I believe they are considering for a while now)..
BoE say they cannot lower rates below 0.5% for operation reasons..I can't think why?
Dec 14 short sterling IR futures traded at 99.2 this morning, i.e 0.8% 3m libor in dec 14!!
I've shorted the contract personally around these levels, but wondering if BoE change their mind and cut base rates to -1% can 3m libor in GBP be priced below zero or substantially below zero??
Secondly I'm also thinking about shorting 10y gilts around 1.4% which I think they will touch again in next month or so, again on my personal a/c.
Any thoughts/debates on whats a better trade short the long-end or short-end?
People say UK/US is not japan, but I think western central banks are going to be more lax with inflation, raise inflation targets from 2% to 4-5%, and already understand (or should understand) that inflation (if any) in future in the next 5 yrs is not going to be demand driven, its resource/food/energy/water driven (supply side/cost inflation) and using interest rates to combat by trying to choke aggregate demand is like flogging a very dead horse. So maybe the long-end is not as rich as it looks, and willem buiters negative rates thought process becomes main stream..
Appreciate thoughts.. |
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They can lower rates below 0.5%, but they just don't like doing it (as mentioned by Merv a few times). There's a few technical reasons for this, which Merv keeps alluding to.
And yes, as a result of a whole variety of moves, short sterling reds and greens are pretty damn high. Whether that's justified or is simply a function of crowded positions getting creamed is unclear.
In theory, it's unlikely that, without currency action, BoE is forced to take rates significantly negative. Indeed, even the Swiss and the Danes, who are far ahead of the BoE in this process, haven't gone that far yet. So, IMHO, negative GBP LIBOR fixings will require a very special sort of calamity or expectations thereof.
Shorting gilts is part of the story, although I certainly wouldn't do it in 10y. 10y gilts are, generally, cheap vs shorter-dated parts of the curve (as well as the longer-dated ones). The gilt curve at the moment is shaped in a very strange way (like a hockey stick of sorts), which is a function of it pricing a lot of different risk premia/effects in different sectors. |
Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness... |
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rkpat
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| Total Posts: 37 |
| Joined: Feb 2011 |
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thanks martin..i havent really looked into which part of the gbp curve is rich..historically 15y was always rich..
Are you referring to 7y?
On a personal basis unfortunately limited to 5y or 10y futures, on sites like saxobank, not sure if their are alternatives.. |
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FWIW, in gilts the area that appears the most cheap to me is arnd the 20y.
I don't think there are easy alternatives to LIFFE futures if you want to do gilts PA. In those, I don't think there's anything that sticks out as particularly exciting. 10y gilts used to be quite cheap, but now are cheap(ish) to fair, IMHO. |
Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness... |
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rkpat
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| Total Posts: 37 |
| Joined: Feb 2011 |
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agree..think this sell-off is over done over the EU announcement.
10y is the only long-end can do PA, but at about $150 a bp as minimum and couple of contracts things could get pretty big. Waiting for a 1.2 handle in the near term hopefully.. |
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