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(1) This past Wednesday I shared meal w/ the only central bank leader I know, and I followed up the meal by tele-dialogue with the only bulge-bracket bank financial trader I know, and I hereunder share the knowledge I think I gained. I am not responsible for ANY misunderstanding I might commit:
Spoiler: from here on out, buy gold, oil, and commodities, and save powder to turn of the new year 2024
(i) Feels that Fed fund (overnight) rate has stopped rising and shall remain at current level through at least 2024 if not longer, a lot longer (implication: no reinvestment-risk if to 1-3 months time- / fixed-deposit at 4.8 - 5.2% plus / minus
(ii) w/ Fed targeting 2% inflation here on out by actions movement of longer duration T-bills (2- / 30- years instruments - the curve is all wrong anyway and needs to go concave, or convex or something - anyways, shape currently all wrong per history). I did a bit of digging and
(iii) 10- / 20- / 30-years Tbills can go to 6-7%, because 2% inflation hard to reach given built-in / baked-in issues to do w/ supply chains and such (meaning mortgage rate can go to 8-9%)
(iv) [stay alert!!!] no more Eurodollar anything starting 1st January 2024 (95% of offshore dollar 'creation')
and
the mob is being herded into some mechanism called SOFR (secure overnight financing rate) reuters.com
LIBOR successor in home stretch for transition in giant US swaps market
The Once-Mighty Eurodollar Futures Contract Fades Away
- Most traders have already migrated to SOFR futures and options
- Remaining eurodollar contracts will be converted on Friday
14 April 2023 at 06:00 GMT+8
Corrected 16 April 2023 at 07:20 GMT+8
A cornerstone of the US interest-rates market for a generation of traders will mostly cease to exist after Friday.
As part of the long-planned transition away from the scandal-plagued London interbank offered rate borrowing benchmarks, derivatives linked to them will also be phased out. That means that eurodollar futures and options — for decades the bread and butter of those wagering on Federal Reserve decisions or hedging moves in short-term interest rates — will soon be gone.
Friday is when CME Group Inc., the exchange operator that lists the contracts, will convert those expiring after June to futures or options on the Secured Overnight Financing Rate, which have overtaken eurodollars in trading volume. SOFR is a relatively new benchmark that officials favor as a successor to Libor in dollar funding markets.
“It’s the end of an era,” said Paul Muoio, chief executive officer of Yellowhook Capital, who started trading futures in 1987 and headed a sales desk at Citigroup Inc. until 2014. “A lot of people cut their teeth in and made their fortunes off of eurodollars.”
Eurodollars debuted in 1981 and became CME’s biggest product in terms of volume and open interest by 1988. They are futures on the three-month US dollar Libor, a decades-old reference rate for bonds, loans and other forms of credit. Their demise is a result of the emergence beginning in 2008 of evidence that Libor had been manipulated by the lenders that contributed the rates used to calculate it.
A panel of industry representatives and regulators picked SOFR to replace US dollar Libor in 2017. Regular publication of three-month Libor will end on June 30, though a synthetic version will be available until September 2024.
Under plans in development since 2019, eligible eurodollar futures will be converted to SOFR equivalents at a fixed spread of 26.161 basis points. That figure was established through the historical difference between Libor — an unsecured rate — and SOFR, which is based on secured loans and published by the New York Fed. Options will be converted based on their strike prices.
Traders and investors have used eurodollar futures and options — and now their SOFR counterparts — to express predictions for US monetary policy, because the rates they reference are influenced by the interest rate set by the Fed. While CME also lists futures on the federal funds rate itself, trading volume in that product typically has trailed eurodollar and SOFR futures volumes by wide margins, making it a less efficient market.
High levels of uncertainty about the course of Fed policy following nine rate increases since March 2022 have aided the surge in SOFR activity this year.
The end of eurodollars would have been inconceivable before 2008, when lots of 25,000 to 50,000 were routinely traded, Muoio said. He said his biggest eurodollar trade was 96,000 contracts.
“I would’ve said ‘No — expletive — way,’” he said.
Most users of short-term interest-rate futures and options have already switched to SOFR from eurodollars. According to CME, open-interest in SOFR products is about 50 million, while open interest in eurodollars slated for conversion had dwindled to about 7 million as of last week. It peaked at nearly 85 million in June 2019.
Options on eurodollar and SOFR futures are the only remaining products for which CME still maintains a trading floor in Chicago, though they also trade on its electronic platform.
bottom line, hiccup might happen, as everyone outside of USA net of borrowing, collectively short the dollar and needs dollars, lots and lots of dollars, noodles and boodles of dollars, as in no-dollar = yes-death
Swaps market braces for $60 trillion Libor conversion
... Central counterparties (CCPs) are projecting confidence about the upcoming conversion of $60 trillion of cleared US dollar contracts to the secured overnight financing rate, or SOFR – a giant undertaking that will be split into multiple parts to spread the load – though some worry the extended process could leave the market with a booking hangover ...
(v) EU has been and shall continue to buy dollars from China, meaning China has been selling dollars seemingly for gold, and all seems to be at the blessing of Yellen at the Treasury ... you know, this very same Yellen (yeah, ask ourselves, since when did a treasury secretary play diplomat? or welcoming committee member - call me absent-minded)
(vi) Sees USD : Euro to 0.80 before end 2024 - OUCHIE!!!
Interesting, all, I thought and so sharing all of above
... and this Yellen
IOW, in broad daylight something doesn't seem right.
