Sunday, December 7, 2008

Fed Funds Futures -- Easy Money

I just noticed that the December Fed Funds futures closed at 99.7275 on Friday. so a 75 basis point cut to .25% next week is almost fully priced into the market now. did I miss a speech or something from some turdburglar at the Company Store?

the irrationality of interest rate futures never fails to amaze me. remember how this Summer the market was pricing in a 3% rate this winter? I understated the matter when I called that 'wishful thinking' at the time. what it was was absurd. and right now pricing of the Fed Funds futures seems just as absurd.

action to take? shorting the December or January contract seems pretty low risk. also put options are pretty cheap as of Friday's close. alternatively one could wait for the inevitable disappointment to take its toll and then go long a futures' contract six to nine months out. if, say, the contracts for next Autumn dropped below 99 that might be an opportunity to put a bet in for a lower rate (higher contract price) next year.

-----

if anyone is serious at looking into this trade, you are welcome to contact me and I'll be happy to go over it with you personally, via phone or IM.