|Source: Lillian Cameron (Flickr)|
Eurodollar futures move inversely with 3-month LIBOR, which is an interbank lending rate set by banks that measures the health of the banking system. In October 2008, when Lehman Brothers went bankrupt and the credit market froze, 1-month and 3-month LIBORs spiked above 4.5%, which meant that the supply of short-term U.S. Dollar liquidity was scarce (expensive). Banks were fearing for their lives at that point (and their counterparties). You can find 1-year, 2-year, and 5-year COT charts at Schaeffers Research. The commitment of traders report shows how net-long (or short) large speculators, commercial hedgers, and small speculators are in the futures contracts. This CME paper has more information on Eurodollar futures: Hedging borrowing costs with Eurodollar futures and options. I have a question: why couldn't the banks predict their own crisis one year and six months in advance? It would have saved the U.S. government big money.
So, where is the market headed now? McClellan mentioned on Bloomberg TV yesterday that the Eurodollar futures COT chart (from last year) sees the S&P 500 correcting until June, but then rallying hard. Watch the video below. He mentioned in early February that the Eurodollar COT chart topped out between February 8-24 in 2011, so the market is late.
UPDATE, July 2, 2012: Bankers have been manipulating LIBOR to benefit their interest rate derivatives traders, which involved Eurodollar futures contracts!.
"CFTC Orders Barclays to pay $200 Million Penalty for Attempted Manipulation of and False Reporting concerning LIBOR and Euribor Benchmark Interest Rates" (CFTC.gov).