From the February 2013 issue of Futures Magazine • Subscribe!

Eurodollar yields and a twisted curve

History repeats?

“U.S. Treasury one-year rate” (below) presents both sides of rate history, increasing and decreasing from April 1953 to September 2012. Starting with low rates in 1953, the one-year rates increased to 16% in 1981 as inflation and real estate prices carried yields and rates to historically high levels.

What do the longer-term charts imply for futures rate and yield changes? A glance at the rate history charts suggests that 2% for short-term rates and 4% for longer-term rates would be a reasonable intermediate forecast. The timing is problematic because of a current slow economy with the Federal Reserve continuing to add liquidity; however, a three- to four-year objective may be appropriate, with a rapid increase in short-term rates beginning sooner than that. Perhaps the next short-term rate peak with intervention by the Fed will take place in 2015.

In the meanwhile, with rates and yields beginning to rise and the Eurodollar rate-to-yield flex curve descending, a long-term strategy of long 20-quarter Eurodollar futures and short five-year interest rate swap futures is a trade strategy to consider.

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