It could finally be time to bet big on higher interest rates

The charts are showing that the long-anticipated major turn in interest rates may be at hand.

For the first time in many months I can build a chart case for going long rates or short the underlying instruments. In fact, a major top is in the making in the U.S. 5-year T-Notes and Eurodollars futures contracts. Even across the pond, a possible top is showing in the German Bund and Bobl.

Eurodollars (interest rates, not forex)

Let’s start with U.S. Dollar-denominated interest rates. The greatest weakness (in price) appears at the short end of the yield curve. The first chart below is the monthly graph for Eurodollar prices, which trade at an inverse to rates. Note that the Eurodollar futures represent an interest rate, not a forex pair. A Eurodollar futures contract is basically a synthetic instrument for a time deposit of U.S. Dollars held in non-U.S. bank, typically in Europe. The monthly graph shows that when the contract trends, it really trends. I have made a lot of money trading this market, which tends to be dominated by institutional volume.

A Eurodollar price of 99.5 equates to a rate of .5%. A Eurodollar price of 99.00 equals to a 1% interest rate and a Eurodollar price of 94.00 equates to a rate of 6%. This chart shows that we are more than two years into a major top in prices (bottom in rates). I should point out that of all U.S.futures contracts, the Eurodollar is the king of volume. This contract (traded at the CME) typically trades two million contracts per day. Two million contracts at $1,000,000 each equals $2 trillion of U.S. Dollar reserves held in foreign banks. The Fed has no direct jurisdiction over Eurodollar rates, meaning that the market is at least somewhat immune from the games played by Little Timmy and Uncle Bennie.

The weekly chart of the Eurodollar shows in more detail the nature of this 2+ year rounding or M top. The mid-point low exists at 99.17. It appears as though the market has already rolled over from the final top (thick line).

The deferred contracts are more decisively anticipating an increase in Euro rates (lower prices), as shown on the daily chart of the Dec. ’13 contract below. (more)