18 March 2011

3-mth EuroDollar Calendar Spread : +Jun11 vs -Dec11

  • 3mth Libor = 0.31%; EDM1 = 0.38%; EDU1 = 0.43%; EDZ1 = 0.53%
  • Rate rise priced in between Mar11 to Jun11 = 7 bp
  • Rate rise priced in between Jun11 to Sep11 = 5 bp
  • Rate rise priced in between Sep11 to Dec 11 = 10 bp (turn factor built in as well as Dec11 contract crosses year end, so actual rate rise priced in probably slight less)
  • Spot - Sep11 = +12 bp
  • Jun11 - Dec11 = +15 bp ie time decay on EDM1/EDZ1 spread for 3 months = 3 bp or 1 bp per month. Thats a miniscule price to pay for a long spread position. Almost a free option.
  • Thus far, intra day, EDM1/EDZ1 has traded to a low of +11.5 on Tues 15Mar11 (day of Japan nuclear escalation and PM Kan news conference).
  • Spread can easily trade to +25 on improving US data eg a few weeks of improving jobless claims (say <380k). My optimistic case scenario, +50 bp.
  • Obviously, long here.
  • Well and truly fuxxed though, if a credit freeze occurs and front end liquidity gets squeezed.

4 comments:

Anonymous said...

this spread is basically driven at 90% by the edz1. you are long edm1 which has a limited upside, but can easily dropped on libor concern or people unwinding and the whole mkt place is long this contract.

Taichiseal said...

Yes. Well aware of that.

Taichiseal said...

Can you please explain to me why you say the whole market is long EDM1?

At +7bp carry to 3mth cash libor (which has been stuck at 0.31% for the longest time so this is as good as the absolute upside limit for EDM1), traders would have to be really really desperate or idiotic to buy this and hope to earn the 7 bp over 3 months.

Anonymous said...

you got the point, swappers like carry trade, we know that fed is on hold and there is a ton of cash is the market, thats why they all sold puts and long the contract, even though you can make 6 bps in 3 months... thats part of the reason why we sold off from 99.64 to 99.59.
that s why i dont like being long this contract. If you want a good short you will have to go further out the curve. or selling edz1 outright which has also a limited upside