This is for those of you who have been trading Eurodollars for a long time. I am currently long a spread dec 06/march 07. I bought for -0.10 and it is currently at -0.30. Historically what is the biggest inversion ever seen with eurodollar futures? How large did the inversion get during the last cycle? I guess what I am really asking is if I want to take a bigger position what should I consider to be the worst case scenario? Is it reasonable to think that I need enough liquidity to hold in through -1.00. Also on the topic of Eurodollars are there any stats as to what percentage of trades are executed as spreads?
I think I've seen -200 maybe more. The Dec./Mar spread is not a regular spread that she be traded based upon Fed/interest rate expectations. The Dec. Eurodollar future is influenced a great deal by actual or anticipated year-end funding pressure on banks. Banks are required to hold a certain amount of cash at year end and as a result, they scramble to borrow funds for value over the turn. If there is a liquidity squeeze for year-end money, the overnight rate for those days can be maybe even a hundred percent plus (that's right 10,000 basis points). It used to be more of an issue when the Fed wasn't that great at managing liquidity in the banking system for year-end needs. For the last decade or so, they have been much better and year-end pressure hasn't been so great. Although I haven't looked at the Euros in ages, my guess is that uncertainty about Dec. '06 year-end is building due to the uncertainty of how the new Fed Chairman will handle liquidity. Hope this answers your questions.
My brother works in Eurodollar options but heard Goldman was selling June/Red June spreads at evens the other day, about 15,000 total, maybe a hedge against something else, but this was when that portion of the curve went inverted. This is just a result of all curves flattening and risk premiums totally vanishing, it was a couple weeks ago we were talking about massive steepening when we had the hurricanes, now with Fed stating more raising to come they are massively flattening this curve again. Interesting times.