Update on Eurodollars Trade

I've discussed a couple of interest rate trades here. Since the model projects zero growth in about 12 months, being long bonds with short maturities should work out well. A good way to go long short maturity bonds is to simply go long Eurodollar futures contracts. These trade actively on the CME. Since I suggested going long the Mar'10 Eurodollar contract (EDH0), it has rallied slightly. Back on March 8th it was trading at yield of 1.67%. On Friday it closed at 1.625%.

Keep in mind this trade has a horizon of six to twelve months.

There is a risk here of LIBOR to treasury spreads moving higher in the short term, but I don't think this risk is significant in the long term. The LIBOR to treasury spreads have edged higher lately as banks still seem worried about lending to each other. The difference between LIBOR and treasury rates is called the Treasury Eurodollar (TED) spread shown in the figure below.



If you want to avoid exposure to the TED spread you might want to buy the two year note (T 0 7/8 02/28/11) yielding 0.956%.

Disclosure: I could be long or short Eurodollars or treasury futures at any point in time. I do not trade the 2Y note.