Spreading fed funds against Eurodollars

I don't trade these products but am looking at this spread and need some help from some experienced traders in these markets. I'm looking at the yield on june ff and eruo$, the former is currently 1.86% and the latter is 2.49%. Yet when these contracts settle in June, won't they be nearly identical in yield? It looks like a fairly stable spread that recently blew out. What am I missing here?

I assume this would be a fairly popular spread, is it? How do you size it? From cme and cbot websites I see $20.835 per half bp in fed funds and $12.50 per half bp in eurodollars. So do you just put it on at that 1:1.67 ratio? Aside from the spread continuing to widen, what's the risk here? If you can stomach any drawdowns, is it a guaranteed profit in the arb?

thanks for your help

 

as I understand eurodollar deposits are not regulated by the fed which makes them higher yielding

 

Eurodollars are based on LIBOR. Libor has a credit component so you are essentially betting that banks "credit ratings" will improve and that banks will be more willing to lend to each other

 

1) When the contracts settle, they WILL NOT be identical! There's no law that states that they have to converge.
2) You're "missing" the credit risk aspect of Eurodollars relative to Fed Funds.
3) It's decently popular spread.
4) You could size the spread by the ratio of the tick sizes. 20.835 divide by 12.5 equals 1.668. You could do 1000 Fed Funds contracts versus 1668 Eurodollar contracts.
5) You could size the spread by the daily expected volatility of each contract.
6) The risks are that you can be wrong on market direction and the spread ratio.
7) There's no guaranteed profit in the trade because the contracts aren't completely correlated.
8) Don't call it an "arb". It's a speculative spread trade.
9) You might be better off trading one eurodollar contract versus another eurodollar contract in a calendar spread. You can have easier execution of the trade that way.

 

Hmm.. This looks interesting. I currently trade the TUD, the two year future against the Mar9 eurodollar. What eurodollar would one use to best hedge the fed funds?

 

Try to use the same month in each spread with no more than one month variation, i.e. July versus July, same month, or July versus August, one month variation. Try to avoid July versus September, two months variation. The can be too much spread volatility, especially if you are leaning in the wrong direction.