Now that interest rates in the US seem to be approaching a long-term bottom, this is a good time to consider the types of trades that can take advantage of an upward trend in rates and yields. Short positions could be taken in various interest rate futures including eurodollar contracts, interest rate swaps and Treasury futures. Alternatively, spreads between eurodollar and interest rate swap futures or Treasury-note futures provide some protection from extremely negative results by balancing long and short positions on interest rates. When the eurodollar yield rises too far above the swaps yield, the spread trade implies buying the 20th quarter eurodollar future while selling the five-year swap because the eurodollar rate must fall to bring about the needed correction in yield. On the other hand, variation of the eurodollar futures yield lower than normal suggests selling eurodollar 20th quarter futures and buying five-year swaps.
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