October 6, the day King announced an expansion by $120 bln to existing stimulus, we immediately recommended selling UK debt or owning (L - S) the term structure. Such a jolt in this particular environment could not help but weaken prices and expand the curve. The strategy worked very well. Half was taken in earlier and we recommended an exit 10/28.
Today of course prices are richer and the curve has come in a tad.
Europe is a wild card for us but past the noise and bullets there we are looking for the opportunity to repeat this exercise, to again own this spread, certainly not the reverse.
But then timing is always key is it not? Consider the gentleman black window spider. He’s a midget compared to the lady spider. During times of romance he’d better not forget his tennis shoes because just following the conjugal visit, he becomes dinner. Timing is everything for this guy.
The crisis may pull the spread even further away from fundamentals, stretched like a rubber band. We want to take advantage any distortion. The Bank of England’s approach, combined with an enlightened administration means more vigor than observers expect into Q1.
Robert Craven
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