Today’s Number: Reading the Fed through Eurodollar Options


The expectations of the Fed, or rather their words about those expectations, contributed to big sell-offs in several markets over the last week (though we’ve seen a bounceback the last couple of days). Most of the attention has been on the recent plunge in stocks and bonds since Fed Chairman Ben Bernanke promised a slowing of quantitative easing last week. Commodities typically tied to growth, like gold and oil, have seen volatility too.

But there’s been less discussion of the activity in another market with a direct tie to the rates set by the Fed. On Monday, we saw record volume across our Eurodollar options contracts with 3,493,675 contracts traded.  Eurodollars are the interest rate on U.S. dollars deposited in foreign banks, and therefore tend to move when the Fed signals a change on the horizon. On Chairman Bernanke’s hint that the Fed would be “letting up a bit on the gas pedal as the car picks up speed,” the market seemed to anticipate that sometime, maybe sooner than most thought, the Fed will lift rates from zero (though the New York Fed President has said that view is mistaken).

For the past three years, with quantitative easing and zero rates firmly in place, there has been a lot of certainty in the Eurodollar market. The signs from the Fed now have brought uncertainty back –  one Fed President discussed the “residual uncertainty” from the recent communications.

The most interesting thing about the volume record this week is that it was distributed across our Eurodollar options products. In addition to the standard quarterly Eurodollar options contract, we saw a lot of activity in the 1, 2, 3 and 4-year Eurodollar mid-curve options. These allow participants to take positions on rates in the short or long term. That all of these contracts saw increased activity is an indication that traders are anticipating something, sometime from the Fed, but there doesn’t seem to be a consensus on when. With more Fed statements and more economic data to come, the volumes on these contracts make for an interesting barometer of how the market is interpreting those communications. Stay tuned…

David Reif is senior director of interest rate products at CME Group.

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