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Yield to the Curve (Part 2)
In Part 1 of this article, we covered the Forward / Yield Curve window from the perspective of the U.S. treasuries, along with the general topic of yield curve shapes and their meaning. Part 2 will continue the financial side with a look at the LIBOR rates, as well as a secondary purpose of this window type -- the forward curve.
LIBOR, London Interbank Offered Rate
These global rates are published daily by the British Bankers' Association and represent an average rate at which banks borrow money from each other, based on the various contributing banks for that specific currency. In essence, these rates are a culmination of where banks traded interest rate products in a specific currency ranging from overnight rates to year-long forwards.
In a similar way to the treasury yield curves, the LIBOR can be read to gauge the high level view of the health of that economy. In the following screenshot, on the left, you have the overnight rate (A1) all the way up to the one-year forward or Y1 rate. Using our definitions established from Part 1 last month, this yield curve is showing a normal shape, suggesting that the Euro interest rate market is healthy.
Forward Curves
The forward curve window is a relatively unique window on the eSignal platform. It allows a speculator or commodity hedger to visualize the price of all the future contracts on a specific commodity: In the case of natural or soft commodities, the cyclical nature of the different delivery months, as well as the curve of the premiums paid over time for more even-keeled futures contracts.Take, for example, the following image of soybean futures.
The front month contract is X9 (November 2009), and over the next 4 months, the cash price is expected to go up through March of 2010, because there is less supply in these winter months. As the spring and summer months roll through, the production goes way up, peaking in the fall. What's most intriguing here, though, is that the 2011 prices are lower. Typically, the farther out a futures contract is, the higher the overall premium you'll pay; however, in this case, the current prices are lower, which is likely based on a higher-predicted production rate for soybeans during this year.
Curves Are a Powerful Asset
Being the world's most used interest rate benchmarks for the short-term market, the LIBOR rates should not be ignored. Priced at 10 dollars per month (exchange fee), this service will likely prove itself quickly. Likewise, forward curves bring additional insight into futures and commodity trading that may not have been seen otherwise. Plus, because it's a free enhancement with eSignal 10.5, there is no reason not to try it.
