0% T-Bill Yield, "Super Contango" Oil Arbitrage, $DJI 50 Day Moving Avg

Wednesday, December 10, 2008

0% T-Bill Yield, "Super Contango" Oil Arbitrage, $DJI 50 Day Moving Avg

Since we're in the middle of a recession investors and institutions have been loading up on 0% 3 Month Treasury Bills as a safe haven. These bills are yielding a negative return after inflation which is crazy. I guess it's the modern day equivalent of stashing money under your mattress. I can understand these moves with job losses compounding and a possible GM, Ford and Chrysler bankruptcy. But watch out for the big bond dump when inflation starts creeping into the system, that's if the last trillion dollar difibrillation attempt finally wakes up the economy. The $DJI is at a critical moment trying to break above it's 50 day moving average. The auto bailout and economic data will be the catalysts either way. G'luck.

Source: Yahoo Finance

Source: Stockcharts.com

While T-Bills were being bought commodities like oil were being sold. While the crude oil spot price was being liquidated I noticed that the futures curve was very steep going out to 2017. On December 10, 2008 the crude oil spot price was at 42.52 while the December 2009 future was at 55.60, a 30% increase in just one year. The December 2015 contract closed at 74.80, a 76% increase!! There's actually a term for this phenomenon called "Super Contango" which I learned from the oil and economic blog Greogor.us where you can find better information. But something has to give here, either the front months rally hard or the long dated futures get dumped because the spread is at a decade high. Oil companies with cash on hand are taking advantage of this arbitrage opportunity by storing oil now and selling the Dec '09 contracts to make a riskless 30% profit! Below is the futures curve, comparison chart and a Bloomberg video. Click the video to be directed to Bloomberg.com.