Written by:
Patrick Mikula CTA
Mikula Forecasting Company
www.MikulaForecasting.com
support@MikulaForecasting.com
Copyright © 2008 by Patrick Mikula All Rights Reserved.
A valuable trading situation occurred this week in the interest rate markets and I would like to bring this to the attention of all traders using the MarketWarrior software. The first chart below shows the 30 year U.S. T-Bond which is a long term interest rate. On July 16, 2008 the long term interest rates had a large decline in the bond price. The bond prices and the bond interest rates, move in opposite directions. This means the large decline in bond price seen on the chart below represents a large increase in long term interest rates. Next we will look at what happened with the short term interest rates.
30yr Bond
The next chart below shows the Eurodollar futures contract which is a 90 day interest rate. This is the December 2009 contract. Notice on July 16 the short term interest rates had a small high to low range and a small down move. This is a dramatic contrast between the large move in the long term interest rates and the small move in the short term interest rates. Whenever this situation occurs there is a very high probability that the short term interest rate is going to catch up to the long term interest rate by having a large fall in the next 1 or 2 days. See the next chart where I point this out.
Eurodollar
This is the same Eurodollar chart shown above. This represents a short term 90 day interest rate. On the chart below I have pointed out the fact that on July 17 and 18 the Eurodollar had the expected large down. This large down move saw the short term interest rates catch up the move in long term interest rates. A large move in long term interest rates, either up or down, that does not have a corresponding move in short term interest rates is a short signal that the short term interest rates are going follow the long term interest rates, either up or down, in the follow days. Hopefully this relationship between short and long term interest rates will be valuable to all our traders.
Eurodollar 2
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