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Derivatives

J.P. Morgan Pitches Cross-Market Swaps

J.P. Morgan is pitching an interest-rate swap strategy designed to win if the Federal Reserve cuts rates more than the Bank of England over the next month. Marius Langeland, interest-rate strategist in London, said the firm is predicting the Old Lady of Threadneedle Street will cut rates to 4.25% before November whereas it predicts the Fed will cut rates to 2% or lower. Langeland said it is predicting larger cuts in the U.S. because it thinks there will be a prolonged downturn with recovery coming after the second quarter.

In the trade investors enter two swaps. In the U.K. leg investors pay a fixed interest-rate, which was 4.77% on Thursday, against six-month LIBOR, and in the U.S. leg they receive an annualized fixed rate, 3.26% last Thursday, also against six-month LIBOR. Six-month U.K. LIBOR was 4.45% and U.S. dollar LIBOR was 2.42% Thursday. The firm is recommending the two-year maturity because that part of the curve is the most affected by central bank rate cuts, according to Langeland.

The trade can be put on in any notional size because the swaps are liquid products, according to Langeland.

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