From the February 2013 issue of Futures Magazine • Subscribe!

Eurodollar yields and a twisted curve

“Eurodollar yield curve” (below) shows the curve of geometric mean rates over 40 future quarters. U.S. Treasury yields appear at several maturities as dots slightly below the Eurodollar yield curve. On Oct. 10, 2012, the distances between the two curves were small, extending from 20 basis points at the shortest maturities, including the five-year maturity, to one basis point at the 40-quarter maturity. At five years, the U.S. Treasury yield is 0.65% while the Eurodollar futures yield is 0.8539%. Yields on accompanying futures that typically are used for hedging or spread trades are December 2012 five-year interest rate swaps with a yield of 0.8525% and December five-year T-notes with a 0.96% yield.

“Ratios of rates to yields” (below) shows Eurodollar quarterly rates relative to the Eurodollar yields at each quarterly maturity, with curves for Jan. 6, 2011, April 11, 2012 and Oct. 10, 2012. The curves “flex” with a change in market yields, rising with lower interest rates and decreasing when yields increase. When the Federal Reserve causes U.S. Treasury yields to fall, the distance between Eurodollar rates and yield curves increases; the opposite happens when Treasury yields rise.

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