Thursday, May 28, 2009

The Debts of the Lenders: Eurodollar Clarification

I received some private messages regarding the Eurodollar chart asking me to clarify.

Here is what it means:

We are in a correction and consolidation period where traders (most likely big desks) are trying to re-assess the spreads over official interest rates - the premium different banks must pay (e.g. 3 month Libor), and the steepness of the yield curve in Treasuries (remember the TED spread explanation I gave?).

Based upon the pattern of the Fed, BOJ, BOE, and even the ECB throwing money at the problem (through quantitative easing bond buybacks, ABS spread price fixing, free money to banks, etc.)
the contract looks like it has a bullish bias.

Another way of looking at it is to say that the banks need to hedge against all the high beta junk they've been acquiring - casinos, luxury real estate, Mexican pig flu tainted resorts, etc.

The caveat of course is that a shoe could drop. Er.. like a potential bond mkt implosion.
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