Consider the following graph of the eurodollar futures price, traded on the Chicago Mercantile Exchange, plotted below as a function the expiration date (in years). This is the "term structure" of the contract, indicating the behavior of the price with expiration. The predominatant aspect of the curve is that it is linear and sloping downward. Since eurodollars futures are quoted as 100 minus the eurodollar rate, the downward sloping futures curve corresponds to a (slightly) increasing forward yield curve.
What caught my eye however was the distinctive yearly structure of the prices. There appear to be yearly "bumps" in the price, or, depending on how you look at it, an annual December "dip."
I decided to take out the annually averaged trend from the series, and graph the deviation (below). Now the seasonal "bumpiness" is quite clear. I say it's a seasonal effect, but bear in mind that these are not variations in time but expiration. It is not clear that there is a way to profit from this effect.
Any comments on the cause of this effect are welcome.
Finally, you may wish to compare the above term structure to that of February 13, 1998, several days before Alan Greenspan's Humphry-Hawkins testimony in Congress (below). The hump was even more distinctive in the June and September 1998 contracts. I can only guess that on February 13, the market was anticipating a Fed easing action in the next six months, and thus a drop in rates. (Remember that a drop in rates causes the eurodollar futures to increase in price). Since February 13, the market's support for lower rates has vaporized along with the hump.
