Hi Louis, The TED Spread, which is the spread between Treasury Bill interest Rates and Eurodollar interest rates comes into play here. A TBill is 100% backed by the full faith and credit of the US Government. You will get paid, under almost any circumstance.
Now a Eurodollar time deposit is by definition a time deposit that is held in a bank or financial institution outside of the US and it is not backed up by the FDIC.
Are you going to get paid back your money if the bank suddenly develops a case of Enronitis? Maybe, Maybe not.
So in my left corner I have a US Government backed TBILL that is fully backed by our benevolent Uncle Sam and in the right corner we have the sauve EuroDollar time deposit, with it get Overseas refinement, allure and higher interest rate; But, it's not as safe, due to default risk.
The Eurodollar time deposits ( which is shorthand for any US dollar denominated deposit that is held outside of the US), are riskier and thus carry a higher interest rate than a TBill.
This TED Spread is a spread that has been actively traded at times in the past, since the spread expands in times of financial crisis such as when Drysdale went under, The Stock Market Crash of 1987 etc.
The open interest in TBills is very very meager these days and so the liquidity is not there to do TED spreads like in the days of old. The CME is showing less than 600 contracts of total open interest in the TBills.
Eurodollar Jun 2002 (9806) vs. Jun 2003 (9586) read in my pidgin 220 bpts. 13-weeks bill June (98.26).
For June, I could sell a 13 weeks bill, buy Eurodollar June and make 20 bpts doing nothing.
so the June ED future and the June TBILL will not see the spread go to zero by the time when the contracts cease trading.
Now the second question if I buy Jun 2003 Eurodollar, I could sell it in one year and make 2.2% profit. Obviously an error
I'll get to in a minute in the next post.
John |
