As of 16 September, Eurex will offer Inter-Product Spread Strategies (IPS) for fixed income futures. With recent severe changes of the European yield curves inter-product spreads are sought-after hedging and trading instruments.
Buy-side investors and proprietary trading firms actively trade the price relationships and moves resulting from the ever-changing slope of the European yield curves. An IPS will let them anticipate yield changes at various points of the yield curve or hedge against a parallel shift of the yield curve, now without the execution risk of trading two different legs.
Also, IPS allow investors to trade the spread between different European government bond futures. Demand here is great as the financial crisis accentuated diverging yields of different European sovereign debt issuers.
Eurex IPS are set up with leg ratios in a duration-neutral fashion, so the resulting position is hedged against a parallel shift of the yield curve. As the spread is traded in a single transaction, it also eliminates legging risk and saves bid-ask spread costs. Once the IPS is processed, positions in the individual legs are created and can be traded out in their respective order books.
Lee Bartholomew, Head of Fixed Income ETD Product Design: “We are happy to offer an alternative, efficient and easy to use instrument for yield curve spread trading as it provides a wide variety of market participants the opportunity to effectively hedge portfolios or generate returns.”
