Eurodollar and Libor spreads - what does it mean?

Dec 08/Dec 07 Eurodollar spread hit 1.2 today. Nov 08/Dec 07 1-mo LIBOR spread is around 1.4. Why the bullish moves in next year contracts? Does this predict lower interest rates? Recession?

Come on smart guys, what does this mean?? And better yet, how can we profit from it?

 

What, nobody knows about this stuff?

 

Not smart here but my answer is Yes. It may predict BOE cut(s). If one thought rates would fall, you'd go long because teh contract value is the implied rate subtracted from 100, right?

Step back a bit also - and think about UK housing - it's a structural wreck worse than the US but in a smaller country - that's all. As insane a bubble as we have here coupled with outrageous borrowing costs, an overvalued currency plus two WMDs the US doesn't have - broad legal approval of prepayment penalties and >90% rate of adjustable rate mortgages. So if I have it right - sayonara UK.

 

Actually, I think many ARM rates in the US are tied to LIBOR and Eurodollar. So the predicted lower rates are for US.

 

So are a ton of US commercial loans. I have a very strong suspicion that the Libor index is a dead man walking in the US. The first blow was after the September cuts here when Libor inexplicably rose or stayed elevated. The next blow will come next spring and summer when consumer advocates and regulators see the association between subprime defaults tied to adjustments up going off that index and bring it to the attention of Congress as an abusive lending practice.

Meanwhile:

November 22 – Bloomberg (Mark Gilbert): “Shifts in the U.S. Treasury market that have driven two-year note yields to 100 basis points below those on 10-year bonds for the first time since January 2005 are not healthy, according to Merrill Lynch & Co. ‘Do not, we repeat, do not believe for a second that this is a healthy steepening of the yield curve,’ wrote David Rosenberg, Merrill's…chief North America economist…”

In my view the economic newsflow from Main Street and Wall Street will deteriorate so much in the next 10 days that another cut on 12/11 is certain - 50bp would not surprise me.

 

Spreads are now nearly 1.6 and 1.7. Unreal.

 

Gonna get worse as the end of the year comes.

 

For what reason?