Futures traders are betting the rate banks charge each other for dollar loans in London will rise on concern that subprime mortgage losses and constriction of credit markets will increase.
The price of Eurodollar futures contracts expiring next month on the three-month London interbank offered rate, or Libor, fell yesterday. The difference, or spread, between it and the March 2008 contract was the widest since Sept. 17, the day before the Federal Reserve cut its benchmark lending rate for the first time in four years.
``The Libor issue is heating up again,'' said Michael Marzano, Chicago-based interest-rate futures trader at Prudential Securities Inc. ``The fear is about short-term borrowing through year-end and if there will be more credit issues'' such as ``the recent mortgage-related writedowns.''
The spread between the price of the December 2007 Eurodollar futures contract and the March 2008 contract reached minus 0.64 percentage point yesterday. The difference between the near contract and the so-called first deferred contract peaked this year at 0.8375 percentage point on Sept. 10, the widest since at least February 1998, as far back as Bloomberg compiles data.
The contracts, trading on the Chicago Mercantile Exchange, are quoted in price terms and based on predictions for the three-month dollar Libor rates. A declining price corresponds to a rise in implied yield.
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