Too bad all trades don’t work out thsi well.
My email from 25 October 2021 below, the rate trade is outlined in section 5 “trading the first leg higher” short 250 GEM22 contacts at 99.80 representing a rate of 0.20% position value $125,000,
Current price for GEM22 98.55, representing a rate of 1.45% position vlaue $781,250 open trade equity $656,250.
Going to maintain this position until the red EMA9 moves above the blue EMA18 on this chart
U.S. inflation 5.40%
3 month deposit rates June 2022 delivery 0.20%
Entry 0.20%, position value $125,000, short 99.80
Objective 1.20%, position value at $625,000, contract price 98.80
5 Year chart for the June 2022 delivery
Today’s probability of a rate hike at the next Fed meeting
About trading rates higher and why
3 month deposit rate history 1934 to 2021
- Low 0.01%, position value $6,250, January 1940
- High 16.30%, position value $10,187.500, May 1981
- Average 3.57%, position value $2,231,250
What we’re trading
3 month rate futures (Eurodollars) represent the interest on $1,000,000 for 3 months, each 0.01% change in rate $25.00 change in contract value, a 1.00% move $2,500 per contact.
- 3 month rates are traded at the worlds largest dollar volume exchange the CME
- The 3 Month rate contracts is extremely liquid
- Total number of contracts outstanding 12,865,411
- Total face value of contracts outstanding 12.865 trillion USD
- Delivery dates traded Oct 2021 through September 2031
- Positions can be established or liquidated 23 hours a day.
- Video introduction to 3 month rate futures (ICE Libor/Eurodollars)
- Rate educational videos and resources
How it works
As rates rise the contact price falls to reflect the increase in rate. To convert contact price into the rate it represents take 100.0000 – the contact price = the rate.
To calculate contract’s value take the rate and multiply it by $2,500.00 USD.
Trading the first leg higher
- There are 6 Fed meetings through June 2022
- Inflation is at 5.40%
- Our trade entry is 0.20%, price 99.80, delivery June 2022
- We’re expecting 2 to 4, 0.25% rate hikes at these 6 meetings through June 2022
- Increasing the position’s value from $125,000 to $625,00 at 1.20%
- At 1.20% 3 month rates will be 4.20% below reported inflation
- If our 1.20% objective isn’t achieved we’ll roll the position annually until it is
New position June 2022 delivery
- Short 250 contracts at 99.80
- 99.8000 represents a rate of 0.20% (100.00 – 99.80 = 0.20%)
- Contact value at 99.80 = $500.00, position value = $125,000.00.
- Margin requirement $176.00 per contact, position requirement $44,000.00
- Each 0.01% change = $25.00 per contact, my position = $6,250.00
- I’m allocating $800.00 per contact, total for my position $200,000.
- In order for me to be stopped out 3 month deposit rates for June 2022 delivery would have to go negative 0.05%.
Track this trade using this chart each 0.01 move up from 99.80 creates a loss of -$6,250, each 0.01 move down from 99.80 a profit of +6,250.
Potential outcomes of this trade,
June 2022 delivery went on the Board 15 June 2012
I’ve capitalized this position with $200,000
At the lowest rate for June 2022 delivery since 2012
- 99.8450, date 4 August 2020
- 100.00 – 99.8450 = a rate of 0.1550%
- Loss of 0.045, -$112.50 per contact,
- Total Loss at the lowest rate for June 2022 delivery since June 2012 -$28,125.00.
If 3 month rates go to the 1934-2021 all-time low
- 99.9900, date January 1940
- 100.0000 – 99.9900 = a rate of 0.0100%
- Loss 0.019 or $475 per contact
- Total on my position at the 1934-2021 low -$118,750.00.
Realistic objective by June 2022
- 98.80 by June 2022
- 100.00 – 98.80 = a rate of 1.20%
- Profit 1.00 or $2,500.00 per contact
- Total on my position at 1.20% $500,000
- If my objective is not achieved I’ll roll the position annually until it is
At the highest rate for June 2022 delivery since June 2012
- 94.885, date 10 September 2013
- 100.00 – 94.885 = a rate of 5.115%
- Profit 4.9150 or $12,287.50 per contact
- Total on the position at the highest rate for June 2022 delivery $3,071,875.
My log-term objective over the next 2 to 4 years is to see 3 months rates move up to reported inflation currently at 5.40%, at 5.40% a 250 contact position will have a value of $3,375,000.
As this position appreciates I’ll be protecting gains using collar strategies with expirations timed shortly after each Fed meeting.
Why I’m in this trade, 3 month deposit rates currently pay 5.20% less than reported inflation (negative rate of return), current fundamentals tell us that U.S, inflation cannot be contained and will fuel rates higher.
Historical real and negative rates of return
1970 through 2007
- Reported inflation averaged 4.71%
- Average 3 month deposit rate 7.03%
- Real rate of return 2.32% (rate paid above reported inflation)
From 2008 through 2021
- Reported inflation averaged 1.98%
- Average 3 month deposit rate 1.02%
- Negative rate of return -0.97% (rate paid below reported inflation)
- Reported inflation 5.40%
- 3 month deposit rate 0.20%
- Negative rate of return -5.20% (rate paid below reported inflation)
By 2008 negative rates of return had collapsed demand for record amounts of new debt hitting the open market.
In 2008 the Federal Government had 2 choices
- To protect the fiscal integrity of America, the U.S. dollar, U.S debt rating and quality of life of future generations by letting the institutions that caused the mortgage crisis fail, balancing the budget and dealing with the impact.
- Have a print and spend party, clean out all the government Trust funds, steal as much as you can, lie about inflation, trash the dollar, the U’S.’s debt rating and fiscal futures of generations of Americans and, do it in the name of “economic stimulus”.
In 2008 politicians chose to have a print & spend party
From 2008 through 2019 (144 months)
- Federal debt grew by 13.972 trillion from 8.86 trillion to 22.833 trillion
- The Federal Reserve created 3.274 trillion dollars with keypunch entries
- 13.972 trillion is more than 3 times the fiscal cost of World War II in 2021 USD
- 13.972 trillion is more than the combined total debt of United Kingdom, Ireland, Australia, Mexico, China and Russia total population of these countries 1.816 billion, U.S., 331 million.
2020 through October 2021 (last 22 months) print & spend party 2
- Federal debt grew by 6.072 trillion from 22,833 trillion to 28.905 trillion
- The Federal Reserve created 4.315 trillion dollars with keypunch entries
- 6.072 trillion in new Federal debt over the last 22 months is 86 billion more than the combined debt of Brazil, Argentina, Mexico, Russia and India, population of these countries 1.918 billion, U.S. 331 million.
- 6.072 trillion is more than 6 times the cost of FDR’s New Deal
Rational for shutting down the global economy, loss of personal freedom and increasing the Federal deficit by 6.072 trillion, a virus less lethal than obesity related illnesses.
U.S. debt versus other countries
Record deficit spending and the Fed’s creation of money caused the first U.S. debt downgrade in history by 2012, as of 2012 11 countries had higher rated debt than the U.S. who then shared the same rating as Hong Kong and Finland.
With current spending and creation of money surpassing the 2008-2019 pace my peers and I expect U.S. debt to be downgraded prior to 2026. If our expectations are correct the U.S. debt rating will fall to A-, par with Japan, Latvia, Lithuania and Slovakia.
Should the Federal Government continue funding record deficit spending with created money at the current pace by 2026 the U.S debt market and dollar will collapse igniting a hyperinflationary Greater Depression.
Greed, corruption and gross political incompetence during the 21st century has reduced annual Federal Revenue to a mere 11.16% of total federal debt, down from 35.98% at the end of 2000 and 28.69% in 2007.
An 11.16% annual Federal revenue to total Federal debt ratio makes it impossible for the U.S. to accurately report inflation, normalize interest rates or any increase in Federal expenses pegged to reported inflation such as Social Security, Medicare, Military and Civilian employee pensions.
Yes, the U.S is going to see the largest increase in Social Security beneficiary payments in 40 years (5.90% in 2022) but overall increases including the one on deck have not kept pace with true inflation, this increase does confirm inflation is here to stay or this 5.9% increase on in 2022 wouldn’t be happening.
The increase in Social Security payments also increases the shortfall in funds needed to meet beneficiary payments and pushes up the projected insolvency date for Social Security from 2035 to as early at 2030.
Military and Civilian employee pensions are also at risk of insolvency because the majority of all monies paid into all Governmental trusts and pensions by their beneficiaries has been borrowed out by the Federal Government, their liquidity replaced with “special issue non-marketable debt” that pays beneficiary Trusts noncompetitive rates. (Non-marketable = illiquid).
What it would take to replace the Federal Reserve
The Federal Reserve currently buys 54.04% of all new Federal debt, trillions more in mortgage backed securities all at noncompetitive rates using money they’ve create with keypunch entries, these purchases have artificially contained interest rates since 2008.
Reported inflation is now running at 5.40%, true inflation north of 7.00% trying to sell record amounts of new Treasury debt in the Free market with these stats will be next to impossible.
- The worst debt rating in history (same as Finland & Hong Kong)
- Further debt downgrades are on deck
- A greater than 4.00% negative rate of return,
- Denominated in a currency the Federal Reserve creates by the trillions at will
It’s going to take an average Treasury rate north 6.00% to as high as 8.70% to attract buyers in the Free market to buy all the new Treasury debt hitting the market. (8.70% was the average Treasury rate from 1970 through 2007) anything south of 6.00% with reported inflation at 5.40% will require the Federal Reserve to keep the printing press on.
Rates and Real Rates of Return 2008-2021
Rates and Real Rates of Return 1970-2007
If Treasury rates did normalize to the 1970 – 2007 average of 8.70%, Federal Debt service cost would increase from 538 billion to 2.483 trillion consuming 69.35% of total Federal revenue.
Impact of lower rates on debt service cost
From 2008 – 2020 Federal debt increased by 200.33% yet annual Federal debt service cost increased by only 30.90%. The Fed pushing rates lower has reduced Federal debt service cost by more than 3 trillion dollars since 2008.
- Total Federal debt in 2007, 8.950 trillion, annual debt service cost 411.32 billion
- Total Federal debt in 2020, 26.880 trillion, annual debt service cost 538.45 billion
Another Round of Economic Stimulus?
During the “economic stimulus of the Obama-Biden administration Federal debt increased by 9.169 trillion from 8.950 trillion to 18.120 trillion up 102.44%, 9.169 trillion is 721.308 billion more than the combined total debt of China and Russia.
Obama-Biden administration’s idea of clean energy
Methane gas capture, cost of production, 7 cents per kilowatt-hour (kWh) or 10 times the cost of hydroelectric power; farmers also receive a 4 cent per kilowatt-hour credit.
2021 “Economic Stimulus” taxes farmers, it begins at $1,800 per ton of emissions in 2023, rising at 5 percent per year above inflation escalating production cost which will be passed onto the consumer.
FDR’s idea of clean energy, multiple hydroelectric dams, the Hoover dam was one built during the New Deal.
The Hoover dam’s construction employed thousands of workers and cost 49 million dollars according the BLS.GOV this translates into 981 million in 2021. Now in its 86th year of operation it continues to control flooding, provide water and clean energy to millions in Arizona, southern California, and southern Nevada.
The Hoover Dam generates on average 4 billion kilowatt-hours of hydroelectric power each year. The plant has a rated capacity of 2,998,000 horsepower. See this Seeking Alpha Article for more on the comparisons of Obama-Biden stimulus programs to FDR’s new deal, what they cost and what they produced.
The 981 million dollar cost of the Hoover dam in 2021 dollars equates to a little less than 3 hours of average Federal Deficit spending over the last 22 months.
Adding to the current debt crisis, the projected insolvency of Medicare between 2024 and 2026.
Projected insolvency of Social Security between 2030 and 2035.
The next mortgage crisis
You can’t have a 30 year mortgage rate at 3.01% when inflation is 5.40% without massive ongoing intervention by the Federal Reserve.
Since 2008 the Federal Reserve has purchased 2.526 trillion in mortgage backed securities with created money.
1.141 of the 2.526 rillion in the last 22 months, if this intervention slows or subsides the 30 year fixed rate will move north of 5.00%. I see mortgage debt owned by the Federal Reserve escalating past 4 trillion by 2026.
To monitor the Federal Reserve’s purchases of mortgage debt see this Fed link.
Higher rates will fuel the mortgage delinquency rates higher from the current 2.49%. By 2026 I see the delinquency rate north of 5.00%.
To monitor the mortgage delinquency rate see this Fed link.
Foreign Held Treasury debt
Currently over 7.02 trillion of U.S. Federal debt is held by foreign entities, all have their finger on the sell trigger.
Ask yourself would you maintain your position in a debt instrument of this country or liquidate it?
- The country’s annual Federal revenue is at 11.16% of total Federal debt
- Reported inflation at 5.40%, true inflation north of 7.00%
- Has guaranteed negative rate of return greater than 4.00%
- Was falling in price (rates rise treasuries prices fall)
- Ongoing obscene deficit spending
- Zero ability to balance the budget
- Zero ability the permanently cease the creation of money
- This Government uses its central bank as a front to buy 54.04% of its own new debt using money created by its central bank.
- Another mortgage crisis on deck
- Facing insolvency of nearly every Government program by 2035
- Wants to spend another 1.5 to 5 trillion after the last 60.888 trillion spent since 2008 didn’t produce anything more than a 19.917 trillion dollar bill for future generations of Americans to pay off.
When this Fed chart turns lower aggressive selling of U.S. dollars and debt will engage as foreign investors repatriate and reallocate funds to tangible assets, quality stocks and/or any of the 11 countries that have a higher debt rating than the U.S.
The buyer of last resort is already in play, the Federal Reserve will continue to create unprecedented amounts of money backed by nothing to try and cauterize the fiscal hemorrhages on horizon, creation of money = inflation.
There is no one to replace the Federal Reserve and the Federal Government can’t afford to raise rates high enough to make Treasury debt attractive enough for the Free market to voluntarily take over 100% of deficit funding.
In 2021 without the Federal Reserve creating trillions to buy the majority of all new Federal debt the Federal Government would be insolvent.
I see total money created by the Federal Reserve increasing from the current 8.56 trillion to more than 13 trillion by 2026.
To monitor creation of money see this Fed chart.
- 40.970 trillion in cumulative Federal Revenue
- 60.888 trillion in cumulative Federal Spending
- 19.917 trillion in new Federal debt
- 7.590 trillion created by the Federal Reserve with keypunch entries
- Cumulative median personal income 2008-2021 $684,478
- Federal Revenue per employed person $277,670
- Federal revenue as a percent of median income 40.69%
- Federal spending per employed person $412,654
- Federal spending as a percent of median income 60.46%
- New Federal debt per employed person $134,985
- Money created by the Federal Reserve per employed person $51,441
Disclosure: I/we have a beneficial long position in the shares of & SHORT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I run a family office, I am not located in the United States nor am I licensed to handle U.S. retail accounts, nor do I sell an advisory service. My services are limited to non U.S. clients and individual U.S. clients that have a net worth of 2 million or more (excluding primary residence) with an existing account of $250,000 or more, U.S. institutions a net of 5 million or more with an existing account of $500,000 or more. Compensation is based on 10.00% of net new high profits quarterly, zero front loads, zero management fees.