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When Irish Curves Are Splining: How To Arb (And Profit) From Unsymmetrical Irish Cash/CDS Curves
As we pointed out earlier, the Irish 10 Year just hit an all time high of 503 and has continued leaking higher. The main catalyst according to several trading desks is the following RIA Novosti report which says that Russia, demonstrating far more prudence than a recently insane China, has stated that it is excluding Ireland and Spain from possible sovereign wealth fund investments: "Russia has excluded debt-saddled Ireland and Spain from the list of
countries whose securities can be used as investment targets for
Russia's sovereign wealth funds, the Finance Ministry said on Wednesday. The Finance Ministry, which posted the respective orders on its website
on Wednesday, said it had shortened the list of sovereign wealth fund
investment "to reduce risks in the process of the funds' management." It appears Russia is gearing for the inevitable jettisoning of a peripheral Eurozone country now that Europe will be forced to take drastic measures to lower the euro following today's QE2, something China appears to not be able to grasp just yet. And while the Irish cash treasury curve is getting increasingly flat, it is still upward sloping. Which is more than one can say for the CDS curve, which just like Greece, went inverted, and the 10 Year is now trading 40 bps inside the 3 Year. Which brings us to our trade recommendation of the day: just like in Greece cash was slow to catch up to synthetic, the expectation is that both curves will eventually overlay. However, as Greece taught us playing cash/CDS basis trades can result in some very dramatic liquidity induced flame-outs, we suggest sticking to either product on both sides of the hedge: namely - establish a cash flattener (sell 10 Year at 7.462%, buy the 3 Year at 5.330% for a pick of 210 bps), hedged with CDS steepener (sell 3 Year at 559 bps, buy 10 Year at 515 bps, for a net of 45 bps), both on a duration neutral basis . Assuming both curves pancake, one would stand to make about 165 bps. Of course, a simpler trade is just to put a flattener on for 3s10s cash.
Below is the Irish cash curve:
And the Irish CDS curve, both standalone, and indexed for German CDS spreads.
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"namely -establish a cash flattener (sell 10 Year at 7.462%, buy the 3 Year at 5.330% for a pick of 210 bps), hedged with CDS steepener (sell 3 Year at 559 bps, buy 10 Year at 515 bps, for a net of 45 bps), both on a duration neutral basis .Assuming both curves pancake, one would stand to make about 165 bps. Of course, a simpler trade is just to put a flattener on for 3s10s cash."
Sounds good. Can I have two of them?
How much longer till the QE2 announcement?
1 hour, 39 minutes
The weird thing is that while there's been multiple postings on Irish CDSs today, ZH failed to report the biggest story of the day so far: the price of gold is dropping like a stone - an almost 2% drop in a couple of minutes earlier today.
Given how many times gold was advocated to ZH readers as the one true safe investment against fiat currencies it's a bit weird that a massive drop in the price was missed.
yepp, fully agree... show both sides of the story.. if gold goes up 2% it gets mentioned... -2% no news...
btw.. im long gold and hold physical.
It's still up over 20% year to date - why don't you wait until it's performance is worse than the stock markets before you start complaining.
(and btw -this is what the metals markets do...)
I'm not complaining at all (disclosure: I have no position in gold) - I just observed this lack of ZH news on this significant move in the price of gold (2% drop within 10 minutes) - which is odd for such a popular ZH topic as gold.
The news is all over the wires.
Intraday moves in an illiquid market (especially one plagued by accusations of manipulation) without reason happen all the time. We will certainly note the move in gold and other PMs upon the announcement of QE.
Its getting owned - small bump after initial release, but what a drop now.
Looking forward to the gold drops like a rock post.
there also hasn't been postings on improving ECRI numbers, only when they were very bad. Today, FT reported individual investors are going into equities, net positive flows, in the past two weeks for the first time in 6 months. Both sides of the coin need to be shown on here, imo. Otherwise, it's no better than any other site.
p.s., of course I apologize if I may have overlooked posts on these subjects, but I usually try to read at the very least all of the headlines.
ft link: http://www.ft.com/cms/s/0/32ae788c-e51c-11df-8e0d-00144feabdc0.html
Seeing how the second leg down in the economy as predicted by the ECRI materialized (note the $1 trillion monetary stimulus in 30 minutes), the ECRI served its purpose. For extended thoughts on this issue, read here. David Rosenberg Slams Business Insider's Vincent Fernando
The Russians are staying! The Russians are staying! Why bother coming?
They just keep getting smarter. There will be winners and losers in the Aftermath.
Russia will be a big winner.
Its so sad to see a country with a zero net debt in early 2007 become a shield to protect bank balance sheets.
Any populist opposition to this as in Iceland, or are people still in shock?
Things are beginning to move - a student protest in the capital today got a bit violent outside Leinster house.
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