Making money on LIBOR fallback (2)

An update on my basis position inspired by fallback expected spread adjustment fallback procedure and value transfer. I took the position one month ago (29-Nov) on a basis swap where I pay LIBOR-1M v receive SONIA + spread on a 30-year tenor for a notional of 1m. The spread of the trade was at 13.45 bps.

First an update on the different spreads (as of Thursday 31 January), with in order, the figures before the announcement, the analysis predictions, the figures on the date I took the position and the figures today

Name Announcement Prediction Position Today
Libor 3M - SONIA 22.50 9 to 18 19.65 18.40
Libor 6M - Libor 3M 5.90 8 to 16 7.60 7.50
Libor 6M - Libor 1M 12.20 14 to 25 13.80 13.70

In all cases the spreads continue to move in the direction predicted by the analysis.

For my position, the spread converge slowly but surely to the expected result. From 13.45 to 12.20, this is already 1.25 basis points gained. This is on top of the 2.75 bps that would have been the profit if I had open the position on the day before the announcement. The 1.25 bps give me a profit of around GBP 2,500.

On the carry side, the position is still very favorable. The GBP-LIBOR-1M fixing on 31-Dec was 0.7303%. The realized overnight composition for the period was 0.7052%. With the trade at ON+13.45 bps, this is a carry of 10.94 bps. On the notional of 1m over the last month, this is GBP 86.95 profit (179.08 total carry over 2 months).

The realized spread LIBOR-1M/ON compounded continues to be very low and to decrease the potential average. The averages and median I used in the graph are computed under the hypothesis that they are 10 or 5-year look-back periods ending on 1-Jul-2021 (the hypothetical announcement date). The current averages are 7.22 bps (10Y) and 4.16 bps (5Y); the current medians are 5.73 bps (10Y) and 4.13 bps (5Y). The graph below provides the LIBOR-1M and realized ON composition for the 10-year look-back period.



Figure 1: GBP-LIBOR-1M fixing and realized SONIA composition on the same periods.


The position still has good prospects and I leave it open.

Don't hesitate to put the same position on!

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