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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Louis V. Lambrecht who wrote (6198)	5/29/2002 8:17:47 AM
From: John Pitera	Read Replies (1) \| Respond to of 33421

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

To: Louis V. Lambrecht who wrote (6198)	5/29/2002 8:59:01 AM
From: John Pitera	Respond to of 33421

if I buy Jun 2003 Eurodollar, I could sell it in one year and make 2.2% profit. Obviously an error June 2002 is here. the June Eurodollar may not do anything between now and when the contract goes off the boards. So you are not necessarily going to make any money in a June Eurocontract. Even if you have an offsetting position in a June 2003 contract. Now what if you are to be long a June 2003 Eurodollar contract (last trade 95.85) and short a June 2004 contract. (last trade 94.84 as of today at 7:30 am CT) Then you have a spread trade on in futures terminology or a "curve trade" on in credit market parlance. Those spreads will move back and forth due to market expectations of where short term interest rates are going to be Next June(2003) and also in June of 2004. The Dec 2002 Eurodollar contract has moved 100 full basis points from 96.00 to 97.00 since late March. That's because in late march the Financial Markets where expecting an economic recovery and a higher US stockmarket. As the US stock market has continued to slide since mid march. The prospect of the Federal Reserve increasing the Fed Funds rate 125 basis points to 3.00% by December have really decreased. If the stock market stays weak and gets weaker the next 2 months then the FED will do nothing on the Fed Funds rate. This could carry on to Dec theoretically ( the weak stockmarket). Now if the USD continues to slide the Federal Reserve may need to start to consider how the very low US short term rates are creating a negative interest rate differential so that currency traders can be long the Eurocurrency, the Australian Dollar, The CAD and earn points every day (interest rate differential points, even if the currencies don't move and hence the FX position traders can just stay short, until they have a technical or fundamental reason to cover.) describing this in sensible terms is something I'm still working on. But as Dr. Evil once told me "The evil joy of having a Laboratory is that you can experiment" -g- John