Inter City Spreads for Longer Expirations -4 Nov ’17 IC spreads

Friday I teed up ten intercity day orders for the May ’13 contracts.  While I’m open to continuing that discussion, today I want to focus on the other end of the expirations -the Nov ’17 contracts.

Unlike the May ’13 contracts where near-term outright price forecasts might cover a narrow range, the outright market for Nov ’17 are quoted on much wider bid/ask spreads.

The good news about inter-city spreads is that they can take two large unknowns (that is the absolute forward levels of two contracts) and reduce the risk to the difference between two contracts.  As such, inter-city spreads should trade narrower than outright spreads.  This tendency is more pronounced the wider (and therefore/typically/ the longer the reference contracts.  (In addition to showing the inter-city spread levels, I’ve shown the “arb” levels that the CME would generate by pairing outright bids and offers.  In all cases the inter-city spreads are well inside those levels.

The attached chart lists four interesting spreads. There are two large regions (LAX and NYM) that together comprise 48% of the CUS10 index (so high correlation with the index), and two more “challenging” regions where forward markets (CHI, LAV)  have tended to be thin and wide, and where the home price story is mixed.

All four represent an opportunity to view/bet/ hedge/ the value of the regional contract versus the CUS 10 index 4+ years from now.  By comparing the relative price improvements versus spot levels (not shown here but available for anyone looking to discuss) one can see that the HCI/LAX spread is quoted at levels that are consistent with LAX outperforming the HCI (CUS) index by 1.5-4.8%, while the NYM and CHI inter-city spread contract prices are consistent with underperformance of 2-5% (NYM) and 0-5%(CHI).

I added the LAV inter-city spread as recent blogs suggest a sharp debate over the forward performance of LAV, either on an outright or relative basis.  Some argue that LAV has huge momentum, that might carry forward into Nov ’17 prices, while others have written about LAV inventory and permits, and suggest that the LAV rally will fizzle.  The first group might consider selling the HCI(CUS) v LAV spread, while the second group (the LAV bears) might want play on the long side of the HCI (CUS) v LAV inter-city spread.  LAV is volatile, thinly traded, a small portion of the HCI(CUS) index, and trades at a relatively low dollar price – all of which tends to keep bid/ask spreads wide.  The same is true for the inter-city spread.

While I’m keen to respond to trade inquires, all traders win on tighter markets, and any contributions to that effort via posting lower offers or higher bids would be appreciated.

If you do have something particular to discuss (or ask about)  please feel free to contact me at johnhdolan@homepricefutures.com