UK Interest Rate Positions

[johnrees]

Hello Everybody.

Am new to the forum and am just starting to try to understand more about the different kinds of derivatives. My trading experiences so far have been limited to stocks & funds plus more recently gold and equity shorts via spreadbetting.

I'm trying to gain a better understanding of the interest rate markets and the different ways that I can take a position at different points in the bond yield curve.

I've started by reading a bit about the possibilities that are open to me via my cityindex spreadbetting account for the UK market, and reading up about those.

I seem to have 2 possibilities:
1) a 3month short sterling future, which if I have understood it correctly then this will tend towards the 3 month LIBOR rate as it nears it's delivery date (the latest delivery date for this at the moment is sept2012)
2) a uk long gilt future, which if I have understood this correctly will tend towards some sort of "notional" bond of approximately 10yrs duration as it nears it's delivery date (currently Mar2012)

I'm more interested in the 2-5yr part of the yield curve, so do I need to look at other platforms to be able to take a position in this or can I just string a series of the 3month streling futures together? - I can't quite get my head around it...

Also could somebody please confirm or correct my understanding of the way the 3month short sterling and uk long gilt futures work?

Thankyou very much.

John

 

[scose-no-doubt]

[Salomon Brothers] Understanding the Yield Curve, Part 1 - Overview of Forward Rate Analysis

I'd read all 12 parts of this before considering whether try trade the yield curve with that bunch of cnuts.

 

[Martinghoul]

Only 7 parts exist, unfortunately...

As to the question, there's a variety of instruments. Your understanding of the way the gilt and short stg futures work is roughly correct. However, liquidity in short stg is really available as far out as the green contracts (2014 maturities) and maybe even the blues (2015 maturities). As to talking a position in the 2-5y parts of the curve, it all depends on what you want to do.

 

[johnrees]

Thanks for the replies.

I've made a start on plowing my way through the understanding the yield curve literature.

The scenario I specifically had in mind was for instance the government deciding to raise interest rates earlier than current market expectation (due to wanting to tackle higher than expected inflation). Which (and this might be where I also have a misunderstanding) looking at the yield curve suggests to me that this is expected to happen in around 2 yrs time. so if this is true (and even if it's isn't lets assume!) then presumably in 2 years time short stg rates would begin to increase.

So withthe above scenario I i'm not sure if futures or options and whether is should be a short stirling future/option for delivery in say 2013 or 2-5yr gilt.

After writing these ramblings I've decided I had probably better go away and read some more.................

 

[scose-no-doubt]

Is it 7? Lol. Shows ya how far I got into it lol.

 

[Martinghoul]

Is it 7? Lol. Shows ya how far I got into it lol.

'Cause you iz a lazy plonker...

 

[Martinghoul]

Thanks for the replies.

I've made a start on plowing my way through the understanding the yield curve literature.

The scenario I specifically had in mind was for instance the government deciding to raise interest rates earlier than current market expectation (due to wanting to tackle higher than expected inflation). Which (and this might be where I also have a misunderstanding) looking at the yield curve suggests to me that this is expected to happen in around 2 yrs time. so if this is true (and even if it's isn't lets assume!) then presumably in 2 years time short stg rates would begin to increase.

So withthe above scenario I i'm not sure if futures or options and whether is should be a short stirling future/option for delivery in say 2013 or 2-5yr gilt.

After writing these ramblings I've decided I had probably better go away and read some more.................

I'd go for short sterling futures/options, if I were you.

 

[johnrees]

Cheers Guys,
A short stirling option for 2014 delivery sounds like my best plan then.

So next question - could you recommend an online platform to be able to do this? I'm based in the UK

 

[scose-no-doubt]

'Cause you iz a lazy plonker...

mate I can't read stats for sh*t. I'm a numbers man. The symbols razzle dazzle me to death. Really need to go get an A level book or something to re-learn it all.

 

[Martinghoul]

Cheers Guys,
A short stirling option for 2014 delivery sounds like my best plan then.

So next question - could you recommend an online platform to be able to do this? I'm based in the UK

Short sterling options are only quoted for the first 8 contracts (that's for the fronts; only 4 for the mid-curves). The furthest option you can price at the moment, therefore, is on the Dec-2013 contract. Furthermore, I have absolutely no idea who can offer these. Maybe Finspreads, but I am not sure.