Trading ECB Meeting-Date OIS Spreads Around Rate-Cut Expectations
Summary
The discussion explains how to express views on ECB decisions through overnight indexed swaps (OIS) spanning meeting dates. It distinguishes a view on the size of an individual meeting’s rate change, which could be structured as an option on a spread between overnight forward rates, from a view that rates will fall at both meetings, which could be expressed by flattening the April/June spread through paying the April leg and receiving the June leg.
The example assumes a 25 basis point April cut is fully priced and no June cut is priced; under a further-cut view, the spread could move by roughly 25 basis points in simplified terms. That illustration ignores compounding and daily ESTR variation. The answer also notes that EUR meeting-date OIS are forward starting, with effective and maturity dates offset from meetings, and that ESTR’s basis to the ECB deposit facility rate means the swaps do not track policy rates perfectly. The discussion does not provide a complete pricing or risk analysis.
Key ideas
- An option on the spread between overnight forward rates can express a view on the size of a meeting’s rate change.
- A view that rates will fall at both meetings can be expressed by paying the April leg and receiving the June leg.
- The example’s approximate spread move assumes the April cut is fully priced and June is unchanged in the market.
- Compounding, daily ESTR movements, and the ESTR-to-policy-rate basis affect the realized relationship.
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Full text
# Trading OIS meeting dates # Trading OIS meeting dates I'm looking to position around the April and June ECB OIS meeting dates. Let's assume the market is pricing in a rate cut in April and then a hold in June. Would it make more sense to take a payer position (e.g., pay fixed in the Apr/Jun spread)? Alternatively, would a steepener be the better structure? How should I expect the Apr/Jun spread to move in response to this expected ECB policy path? ## Answer by JUW (score 2) https://quant.stackexchange.com/a/82044 You can trade digital put on the rate cut size in April meeting. This can be strcutured as option on the spread between two 1D ESTER forward rates. Generally speaking, to express view on central bank decisions, one can trade options on overnight rate. ## Answer by retino4 (score 1) https://quant.stackexchange.com/a/84006 Naturally, the way you would trade the outlined meeting spread depends on what your view is. For the sake of answering your question, let’s assume that the April ECB meeting has a full 25bps priced whilst the June ECB meeting has 0bps priced. If your view is that the ECB will cut in both April and June, then you could trade this by flattening Apr/Jun (i.e. pay Apr, rec Jun). In this scenario, you would make ~25bps (simplistically ignoring the effects of compounding & daily fluctuations in ESTR). In terms of the mechanics of the product, it is worth noting that overnight indexed swaps linked to meeting dates are forward starting. In EUR, the effective date of the swap occurs T+4 after the meeting date, and the maturity is T+4 after the next meeting date (note that this is a bit of an anomaly compared to most other G10 currencies - T+1 or T+2 is more common). It is also worth noting that at the time of writing, o/n ESTR has a negative basis to the ECB’s DFR, so an ECB OIS is not perfectly linked to the underlying policy rate.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.