Look at the heatmap above: it shows the 1 minute correlation matrix for the US interest rate futures complex including the first 16 Eurodollar contracts and the Treasury curve. Unlike heatmaps of the stock market, this matrix is smooth from cell to cell: note the beautifully sloping gradient from the front end of the curve (GEH5) to the back (UBH5). No one would blame you for thinking that any market with such an ordered correlation structure must be one of the most efficient in the world.
As the second chart shows, however, the market has a funny way of shattering consensus opinion. Buoyed by the prospect of QE from Europe and stagnant prices at home, US Treasury bonds had begun to enter bubble territory. Short term interest rate traders bid up the price of Eurodollar futures, pushing back their expectations for the date of the first rate increase.
But early this week the…
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