TLDR: USD⬇️/ BONDS ⬇️ / SPY ⬆️ / Inflation ⬆️
Eurodollars are USD holdings by banks outside of the US (ie. outside of the reach of the Fed). They're the evolution of banker's acceptance notes, & used for interbank transactions. Think of it like 'electroninc banker dollars'. Eurodollars make up 90% of all international loans. $GE1! (their futures) are the contracts to borrow or lend US$1,000,000 for three months. Buying the contract is equivalent to lending money, and selling the contract short is equivalent to borrowing money....
$GE1! prices are driven by the market's forecast of the 3-month USD LIBOR ir% (London Interbank Offered Rate... the % banks charged each other to lend, aka ICE LIBOR). A price of 99.83 (current) implies an ir% 100.00 - 99.83, or 0.17%. (PS - Libor is ending Q4 2021..)
$GE1! eurodollar $futures are used by companies and banks to secure an interest rate for money it plans to borrow or lend in the future, and to hedge against yield curve changes. Some say this liquidity ($moving) of $GE1! first goes through banks, then $SPY a year later...
So how do bonds play into this? Bonds compete with stocks for investors' dollars & are a safer investment but lower returns. So when bonds ⬆️ $SPX ⬇️. Yet from 1929-69, $SPX⬆️ $bonds ⬆️, then flipped 1970-98 (bonds ⬆️$SPX ⬇️), 2013-2019 flipped back (bonds ⬆️ $SPX ⬆️). Then Covid happened...
Last step is to throw it all in the gumbo: $SPY / Bonds / #Eurodollars. So if $GE1! thinks the FED hikes %IR by Sept 2023 (implied vol. speculates hike of 0.25%), our low TED spread (delta of Treasuries - Eurodollar) means lots of lending, low risk of default. $GE1! #Eurodollar Up, Interbank Lending Up, $USD down, bond yields down, then interest rate hike, $TLT down, inflation up, $USD down, $SPY up.
FYI, this is me (an amateur) thinking aloud over a Sunday morning coffee. I'm sure there's glaring gaps & unknown unknowns...and I'll prob read this next year & LOL).
For more references, check out:
Eurodollars are USD holdings by banks outside of the US (ie. outside of the reach of the Fed). They're the evolution of banker's acceptance notes, & used for interbank transactions. Think of it like 'electroninc banker dollars'. Eurodollars make up 90% of all international loans. $GE1! (their futures) are the contracts to borrow or lend US$1,000,000 for three months. Buying the contract is equivalent to lending money, and selling the contract short is equivalent to borrowing money....
$GE1! prices are driven by the market's forecast of the 3-month USD LIBOR ir% (London Interbank Offered Rate... the % banks charged each other to lend, aka ICE LIBOR). A price of 99.83 (current) implies an ir% 100.00 - 99.83, or 0.17%. (PS - Libor is ending Q4 2021..)
$GE1! eurodollar $futures are used by companies and banks to secure an interest rate for money it plans to borrow or lend in the future, and to hedge against yield curve changes. Some say this liquidity ($moving) of $GE1! first goes through banks, then $SPY a year later...
So how do bonds play into this? Bonds compete with stocks for investors' dollars & are a safer investment but lower returns. So when bonds ⬆️ $SPX ⬇️. Yet from 1929-69, $SPX⬆️ $bonds ⬆️, then flipped 1970-98 (bonds ⬆️$SPX ⬇️), 2013-2019 flipped back (bonds ⬆️ $SPX ⬆️). Then Covid happened...
Last step is to throw it all in the gumbo: $SPY / Bonds / #Eurodollars. So if $GE1! thinks the FED hikes %IR by Sept 2023 (implied vol. speculates hike of 0.25%), our low TED spread (delta of Treasuries - Eurodollar) means lots of lending, low risk of default. $GE1! #Eurodollar Up, Interbank Lending Up, $USD down, bond yields down, then interest rate hike, $TLT down, inflation up, $USD down, $SPY up.
FYI, this is me (an amateur) thinking aloud over a Sunday morning coffee. I'm sure there's glaring gaps & unknown unknowns...and I'll prob read this next year & LOL).
For more references, check out:
- There's a great article about the FED / USD / Eurodollar liquidity here:
- Or check out "Eurodollar futures point to Fed rate hike as soon as Sept 2023"
- TED Spread Chart
- TED Spread wiki