Friday, 8 May 2009

On the curve

Bloomberg says Geithner Bets U.S. Can Avoid Japan Trap Through Bank Earnings.

For that bet to come off, US banks have to earn lots of money.

What's the major determinant of bank earnings that Geithner can control? The shape of the curve. Banks make money if their short term cost of funds is lower than the longer term rates that the loans they make price from.

So... pay 1m USD Libor, receive constant maturity 3 year swaps. Trade of the month.

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