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Eurodollar COT Model Calls for July 2023 Top For Short Term Rates

Chart In Focus
January 20, 2023

The 2-year T-Note yield says that the Fed should be all done raising rates now.  But the PhDs running Fed policy think that they know better, and insist that they are not done raising short term rates.  This week’s chart agrees that there are still more months of rising short term rates ahead.

This leading indication relationship employs data from the CFTC’s weekly Commitment of Traders (COT) Report.  The lower plot represents the net position of the “commercial” traders of eurodollar futures.  This is not the euro currency, but rather it refers to dollar-denominated time deposits in European banks.  It is also known as LIBOR futures. 

This plot of their net position is shifted forward by 10 months to reveal how short term interest rates tend to repeat those footsteps after that lag time.  Why it is a 10 month lag that works best is something I cannot explain.

It is noteworthy that this leading indication relationship did not work very well from 2009-2015, when the Fed was maintaining its “zero interest rate policy” or ZIRP.  A change in leadership at the Fed chairman’s office allowed short term rates to start following the market pressures, and responding as this model said that they should. 

The correlation is far from perfect, and the COT data are a lot noisier than the rates data.  That is just part of the nature of this relationship. 

If we zoom in even closer, that correlation is not quite as evident, even though the long term chart above still shows that it is real.

eurodollar cot model for short term rates

The recent rise, though, has matched the message of this model.  And there should still be more room for short term rates to keep climbing, as the Fed officials live up to their recent promises and keep hiking rates even though they should stop.  This model says that the peak is ideally due in July 2023, but I would take that information as being extremely approximate.  More meaningful is the message that by autumn 2023, short term rates should be coming down with some urgency, presumably resulting from the Fed officials realizing by then that they really did take things too far.

Tom McClellan
Editor, The McClellan Market Report

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