The one way trade in eurodollars

The Eurodollar futures market is almost daring you to short it - and it's been this way for over a year. At 99.50, you can't lose any more than 50 basis points or $1250 per contract. With the government printing money like there's no tomorrow and almost every economist talking about an inflationary bubble, the downside potential seems limitless - well, perhaps 5.00%, anyway. A 10 to 1 risk/reward ratio - can this be real? Perhaps. But there's one problem. Unless you think that bubble is going to burst SOON or unless you think that a Fed tightening is imminent, there is really only one force working on the Eurodollar futures market; and that is the force of convergence. Three month dollars (LIBOR), the underlier for the Eurodollar futures contract is and has been at 30 basis points. That equates to a futures price of 99.70. Currently, the price of every Eurodollar futures contract throughout the entire five year strip is cheaper than 99.70. Therefore, in the absence of any change in market conditions, Eurodollar futures will continue their slow, steady grind upwards to a 30 basis points LIBOR rate. When it finally moves, everyone will probably miss the first 100 basis point to the downside. Puts, anyone?

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