Eurodollar (ED) futures react to Libor transition announcements

For an explainer on Libor transition, see preceding post.

On Monday, 30th November, IBA announced the start of a consultation that involves an extension of the discontinuation timeline for key tenors in US Libor to mid-. This announcement caused ED futures settling pre-June 2023 to move higher since expectations are that these contracts will now reference actual Libor, expected to be lower than fallback Libor that would affect contracts settling post-June 2023. 

EDM2 reacts to IBA announcement on 30th November. Chart by Refinitiv

On Friday 4th December, ISDA stated, “an announcement early next year for all US dollar LIBOR tenors would fix the spread for all tenors. And in that instance, the spread would be applied – that is to say, contracts would fall back to the fall-back rate after June 2023.”

ED futures continued their post 30th November trend more aggressively by re-pricing the post-June 2023 strip (referencing the fall-back rate) about 10bps higher (futures price fall 10 ticks) than those settling pre-June 2023 (which would continue to reference USD 3m LIBOR).  ED M3U3 widened by about 10 ticks from 30th November. This was effectively a 10 standard deviation event on a one-year trading range of 4.5 ticks.  

ED M3U3 spread widens 10 ticks on elevated volume. Chart by Refinitiv