Red/green euro$ pack spread
February 9, 2022
–Yields ended higher on Tuesday with tens at 1.952%, up 3.6 on the day and just eclipsing the pre-covid high in late 2019 of 1.94%. The thirty-yr ended just under 2.25%. All near eurodollar calendar spreads made new highs: EDH2/EDM2 settled 45.5, up 1.5 on the day. EDM2/EDU2 settled 31.5, also up 1.5 on the day, and EDU2/EDZ2 settled 30.0, up 1 on the day, all new highs. In one-year calendars, EDH2/EDH3 settled 126, up 4.5, in the 5 hike area, while EDM2/EDM3 settled 98.5, up 4.0. However, further back, spreads have flattened to new lows. The attached chart is the red/green pack spread on a rolling basis, currently the average price of the 2023 contracts vs the average price of the 2024 contracts. In 2017 to the end of 2018 the spread compressed as the Fed was hiking, finally bottoming just after the last hike. In this cycle, the decline has been fierce to a new recent low of just under 13 bps. This level is equivalent to the 2018 price when the FF target was 1.25 to 1.75. I guess that makes some sense given that five hikes now seems to be consensus. Front loaded hikes followed by stagnation.
–WASDE crop estimates released today at noon EST. I asked a friend intimately involved with that side of the business and he said the report probably won’t be all that important, but to keep an eye on corn. He said it’s all in the hands of the commercials now, that US farmers have sold out of their inventories and the producers need the supply. ADM and Bunge closed at new highs yesterday; it doesn’t take a genius to see that foodstuffs are in a bull market.
–Ten year auction today. I’ll begin noting which eurodollar contract is closest in yield to tens. EDM’23, the sixth quarterly, has a yield of 2.03% (price 9797.0). Tens yield 1.95%.
