I've posted a recap of activity in the CME Case Shiller home price index contracts to the Resources section of my website. You can find it there or click here.
Key points from the recap include:
–Activity for September included 16 lots traded, across 4 expirations, and 6 regions. The rolling 12-month tally of trades is still ~300 lots.
–Bids, offers and closes were much higher during the month as front contract prices moved to levels above spot. By comparison Aug/Nov calendar spreads had traded at 6-8 point premiums only a few weeks ago.
Note that I cited more than closes, as there is more going on than closes might reflect. The following graph has a few points worth noting:
1) The CME rule for closes (last trade, higher bid, lower offer) tends to be governed by bids during rising markets, and offers when sellers are more aggressive. For example, in coming out of the sell-off from this spring, changes in bids defined closing prices in June and July. Similarly, the recent uptick in closes has been defined by the "higher bids" rule. On the other hand, the lower offers rule, defined the downtick on closes in late August. That is, even as mid-market levels moved down from early July to late August, and up from early August to late September, closes didn't change.
2) Trades can take place in a contract (here using HCIX20) without an outright buy or sale. For example (in this case) some of the HCIX20 trades were one leg of an Intercity Spread or Calendar Spread trade.
3) Bid/Ask spreads tend to narrow toward month-ends. More traders tend to participate in the market as the Case Shiller numbers get close to being released (on the last Tuesday of every month). More interest tends to lead to tighter quotes, but then spreads tend to widen in the new month when trading quiets (even though the market has the just-released CS #'s to give it more color).
4) Note that I've used a front contract here. Since the Nov '20 contract references activity through Sept 30, there should be ever smaller impacts of "new" news as the bulk of the index calculation involves activity that has already taken place. This month was different as the markets (and I) incorporated a more bullish read on activity during the CS measurement period.
–Bid/Ask spreads widened dramatically, and two-sided markets only existed in a limited number of contracts (X20, G21, G23 and G25) as a) I limited the number of quotes I posted as volatility picks up, and b) most third-party interest was already in the front two contacts. (Note that my core focus will always be: the front contract, and a short, intermediate and long February expiration.) By contrast, there were bids and offers on all 110 contracts on Aug. 31.
–While Open Interest (OI) has increased over the last two months from 36 to 49 (despite Aug ‘20 rolling off), the average time-to-expiration has contracted to ~0.75 years (w/ almost half of OI in front contract). I'd note that this is a dangerous trend for the contracts, as unless trading interest develops in longer-dated contracts, OI may drop to historic levels post Nov ’20.
–I continue to hear from readers looking to hedge regions not covered by CME contracts (e.g. Seattle, Austin). I’ve tried to also steer many of those conversations to RP swaps.
Feel free to contact me if you have any questions about this blog, have trading ideas, or want to learn more about using home price index derivatives in hedging strategies.
Thanks,
John