Relative value across regions

While one can take outright views on forward prices, there may be some users who'd like to express a view on the performance of one region vs. another, or of a region vs. a broader index. For example, one may have strong views on California markets vs. the rest of the country, but not want as much exposures to prices going up or down. One might have strong views on how certain areas (e.g. Las Vegas) may react to changing appetites on tourism and gambling, but may not want to take an outright view. Finally, some might have longer-term views on Miami (either positive due to population gains, or negative due to rising sea levels).

With the re-introduction of longer-term expirations on the CME Case Shiller home price index futures, it's now easier to express five-year relative value opinions via Intercity Spread ("IC") trades. Recall that IC trades allow a user to simultaneously buy one regional contract vs. selling another (or in this case the 10-city index contract) at a predetermined point spread.

The bar graph below illustrates the results of translating intercity bids and offers from a point basis to a percentage basis. (See below for details). For example, the BOS segment reflects clearing levels on the Feb '21 (G21), '23 (G23) and '25 (G25) BOS contracts relative to the 10-city index contracts.  The percentage results show by how much the futures are priced relative to spot levels. That is, for the G25 contract the intercity bid (the level where someone would buy BOS/ sell 10-city) is 0.5%, while the offer is to sell BOS/ buy 10-city at 2.5%.  The 0.5% bid, might be the equivalent of someone saying that they'd buy the BOSG25 at + 5.0% over BOS spot, while simultaneously selling the 10-city index contract +4.5% >Spot. The seller's quotes might translate into selling BOSG25 at +7.5% over spot, while buying CUSG25 +5.0% over spot.

The payout on an IC trade will depend on how the BOS and 10-city indices perform relative to each other at the end of 5 years.

Note that there are some regions that are priced (quoted) at levels consistent with out-peformance (e.g. BOS, WDC, DEN, LAV, and for some expirations, MIA). Others (e.g. NYM, CHI, LAX, SFR, and at time SDG) are priced consistent with under-performance. Users with reverse views, or with views that the "bullish" and "bearish" regions will move to even wider out-/under-performance may consider using IC trades to express such views.

Note that IC contracts are quoted one lot vs. one lot so that the notional amounts don't line up.  For example, the notional value of a 10-city contract (of $250 *spot index of 231.45) is ~60% larger that the CHI contract. As such, to do equivalent notional value, one will have to add outright lots on one side of the trade, to even notional amounts. (A solution is also possible via OTC trades, to include relative value exposures for other regions not covered by the CME at using HPHF home price index agreements. Please contact me if interested in hearing more about that approach).

I'm eager to promote discussion of longer-term relative values, and will facilitate efforts by users to gain exposure to either side, so please feel free to contact me. Not many dealers support IC quotes, so please contact me if you'd like one, or to discuss how to leg into such trades.

Further, any permutation between regions is possible (e.g. BOS v NYM, or LAX v SDG). Please contact me if interested.

Finally, I've included (below) a table of some quotes on Feb '25 IC markets, and how I translate point differences into percentages. Please feel free to reach out with any questions.

Thanks,  John