I've had a number of users ask how to express a view on one city vs. a more national average. While I've been touting HPHF Ratio Agreements for those cities not referenced by CME futures, I've observed that CME InterCIty ("IC")spread trades can be done on the Case Shiller 10-city index components. While I've highlighted some of the challenges of IC spreads (e.g. different notional values, wide bid/ask spreads) a big impediment to trading may have been the ability to intuitively translate the dollar-spread quotes on IC trades to a sense of projected relative performance.
Using the concepts developed in HPHF Ratio Agreements, the diagram below can be used to translate HCI/SFR IC quotes for G23 (Feb 2023) and G24 (Feb 20240 into forward ratio agreement-like forecasts. That is the forward ratio bid for the SFR/HCI illustration= implied SFRG23 price/Mid HCIG23 price, or (=(320.6--47)/ 320,6 or 1.147.
There are two key observations:
1) Given the challenges that many researchers have touted about SFR (e.g. loss of population, an employee base that is most suited to remote work, and a reputation for a large homeless population on the "vibe" of downtown), the forward ratios for SFR/HCI are lower than spot. Net, these quotes are consistent with forward SFR index values underperforming forward HCI indices.
2) To address recent inquiries, the bid/ask spread of the ratios is proportional to the bid/ask spreads on the IC quotes. That is, the implied forward "views" on the SFR/HCI G23 ratio is -1.27/-0.11% or 1.26% bid/ask spread, while the G24 ratio is -2.43/-0.98% or 1.45% bid/ask spread. These are much tighter than HPHF Ratio Agreements as those are less liquid. Note further, that someone entering an SFR/HCI ratio would have the ability of reversing the HCI leg at their discretion (when doing an IC trade) to back into an outright position on SFR. Further, an IC exposure (or either leg) can be unwound lot by lot without engaging HPHF on future trades. So, for example, if someone wanted to enter a 7 lot x 7 lot IC trade, they could a) take off the 7 lot HCI leg to back into an outright short of 7 SFR, and b) they could add/remove either leg to change their exposure. Finally, while I have noted the notional differences in the past, someone short 7 SFR G24 lots (with notional value of $250* 375 * 7 = $656,250) would only have offsetting exposure of ($250* 330 *7= $577,500), I'd be happy to help them square up their position by buying an additional HCIG24 to take the total HCI notional exposure to $660,000 - almost a perfect match with the notional SFR exposure.
Given that some of the other components of the Case Shiller 10-city index (e.g. BOS, DEN, MIA, SDG) have more favorable outlooks, it surprises me that, given the news on SFR, that the forward ratios aren't much lower. If you feel different, or want to jump on the IC quotes (which I'd make 5 lots by 5 lots) before the next person, please feel free to contact me.
Thanks,
John