August 4. Comparison of Eurodollar Calendar Spreads

–In May of 2013, then Fed Chairman Ben Bernanke suggested the Fed could begin tapering its bond purchases.  So began the infamous ‘taper tantrum’.  In early May of 2013, pre-tantrum, near one-year euro$ calendar spreads were near their lows (they had been a bit lower during the height of the European sovereign bond crisis in 2012, but I am just looking from the start of 2013 forward).  Note that as of yesterday’s close, nearly all one-year ED calendar spreads are close to their lows since 2013.  For example, EDU6/7 settled at 11.5 yesterday; EDZ6/7 settled 11.5.  Moving out a year, EDZ7/8 settled 13.5, and EDZ8/9 at 16.5.   So let’s go back to pre-taper tantrum.  The low in the 1st to 5th spread on May 2, 2013 was 7.0 (corresponds to Sept16/17).  The 2nd to 6th was 9.0, which compares to EDZ6/7 now at 11.5.  However, the 6th to 10th spread in May 2013 was 24.0 bps, compared to 13.5 now.  And the 10th to 14th spread was 49.5 ( ! ) compared to just 16.5 now.   In other words, the reds to greens and greens to blues were massively steeper at the start of 2013 than in the current situation.  Note that in May of 2013, the Unemployment Rate was 7.5%, as opposed to sub-5% currently.  Additionally, wages are starting to firm up.  According to the Atlanta Fed Wage Tracker ( ) the growth rate in 2013 was 2.2% and currently it’s 3.6%.  The point is, that it’s awfully difficult to justify the flatness in the back end of the curve unless the market believes we’re on the verge of another deep recession.

–By the way, the intervening highs in the one year spreads occurred in 2014.  The 2nd to 6th went to 105, 6th to 10th to 122.5 and 10th to 14th to 119.5.

–Let’s also consider the level of the SPX in 2013 compared to now, 1600 vs 2150.  Net worth was $76.6t and is now $88t.  Of course, it’s growth rates and not absolute levels that are the primary concern of the back end of the curve.  And central bank intervention is also a major factor, as the market awaits the BoE’s rate cut and expansion in the APF.  To conclude, the back end of the curve appears expensive, and vol cheap given current US prospects.

Posted on August 4, 2016 at 5:09 am by alexmanzara · Permalink
In: Eurodollar Options

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