Options Jive

Probability of Short-Term Rates at 0%

| Jul 15, 2016
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    Options Jive

    Probability of Short-Term Rates at 0%

    Jul 15, 2016

    Yields on long term US Treasury securities recently went to a new all time low. Yields on the 10 year note and longer from several countries have already gone negative. The June 22, 1016 segment of Market Measures Negative Yields | Still Far Off in America demonstrated the low likelihood of the yield on the US Treasury Bond, whose Futures symbol is /ZB, going negative. What though is the chance that short-term rates will go to zero?

    The Eurodollar Futures contract (/GE) is one of the most liquid Futures contracts ever. It is an excellent approximation of the market’s outlook on short term US rates. The Futures options for Eurodollars are also extremely liquid. The price of the Eurodollar Futures represents 100 minus the interest rate. That means a zero rate would mean a price of 100.00. The Delta of the 100 strike represents the probability the market gives to the chance rates will hit zero.

    A table was displayed showing the Delta of the 100 strike in options going out in time. The Delta was 0.02 from July through December, was 0.04 in March 2017, 0.06 in June 2017 and 0.09 in September of 2017. That means the markets perception was that there was just a 2% chance we will see a zero rate for the Eurodollars anytime this year and little likelihood next year.

    The segment from Best Practices on June 13, 2016: DV01: DV of What? explained how to use DV01. A table laid out the move that would occur if short-term rates went to zero, assuming a constant DV01 rate for various points in the Yield Curve. The table included the Futures for the Eurodollars, 2 Year notes (/ZT), 5 Year notes (/ZF), 10 Year notes (/ZN) and the long Bond /ZB. A table supplied the Deltas for several months going out for the price of the 10 Year futures should short-term rates go to zero as implied by the DV01 rate. They were slightly higher than for the Eurodollars but still very low.

    Watch this segment of Options Jive with Tom Sosnoff and Tony Battista for the important takeaways and to see what the market thinks the chances are for US short-term rates to go to zero.

    This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.

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