inter-city – Page 3 – HomePriceFutures.com

Basics – Restarting Intercity (IC) spreads

Intercity spreads (IC) are a way to express a view on the relative price moves between two regions for the same expiration. They can be handy trading tools if one has conviction on the future performance of one region versus another, but where the trader doesn’t want to take as much risk on the absolute level of future index values.

For example, the HCI/NYM X16 IC spread was quoted 10.6/13.6 earlier today. (As with calendar conventions the CME quotes the spreads by ta IC Jan 6 king the difference between the first value and the second. Be careful as some brokers may have a different convention.)

The table to the right shows that the 10.6 quote could be translated a 203.0 bid for the HCIX16 contract and a 192.4 offer on NYMX16 (or 203.6/193). At those levels the HCI bid represents a 7.9% increase over spot levels, while the NYM offer represents an 8.8% increase or a (rounded) 1.0% difference. If the trader executed and held the 10.6 position through to maturity, and both indices gained 8% by Nov 2016, then the trader would come out ahead as the HCI long index position did better than 7.9%, while the NYM short index position did worse than 8.8%.

(An important note -this example has two indices priced at about the same level so similar percentage price moves translate into somewhat close point moves, and I’ve used an illustration where the eventual price move (8%) was close to the original levels. That would clearly not be the case for two indices (e.g. CHI vs WDC) with dramatically different index levels. As such 1:1 IC trades might need to be adjusted with additional outright trades, to balance notional exposures, if a trader wants to more precisely express views on percentage index moves).

Conversely the offer of 13.6 is priced such that HCI leg (that trader is offering to sell) is priced for a higher gain than the NYM index.

I’ve found that bar graphs such as this one are useful in interpreting how the CME market is pricing future gains across the 11 contracts. Note that since NYM and LAX are such large components of the CUS-10 index that percentage gains on those contracts tend to be near the CUS-10 index.

Some contracts already have over-/under-performance (vs. HCI index) already priced in (much like outright contracts already have higher forward prices, priced in). For example, an offer willing to buy HCI and sell LAX at even percentage moves would be off the market, as the bar chart indicates that the CME futures quotes have already priced in weaker performance by the LAX index (relative to HCI). Similarly, a bet that MIA will outperform HCI will be off the market, as stronger MIA performance is already reflected in the CME outright quotes.

IC trades can be used to express views on individual indices vs. the CUS-10 index (as above), within a region of the country (e.g. BOS v. WDC, or LAX v. SDG), or for any other combination (e.g. LAV v MIA as a possible tourist, foreign investor play).

A benefit of IC orders is where one leg (e.g. HCI) trades at very tight bid/ask spreads. Then an IC order might translate into an outright level on the second leg that may be inside the prevailing outright level on that second leg. Thus tight first legs (HCI) and good two-way IC spreads can help bring in outright spreads. This is particularly useful in longer-dated contracts (especially in thinly quoted contracts) where the absolute level of forward index levels (on the second leg) is reflected in very wide bid/ask spreads.

So, I’d encourage traders to express outright (not calendar-derived) views either on longer-dated HCI contracts and/or IC spreads. Either will contribute to tighter bid/ask spreads (or better depth) in the longer dated regional markets.

While the CME publishes quotes on IC spreads I understand that not all data vendors do. Here’s a few of my quotes to give you a feel for IC spreads and for you to test translating IC spreads into implied out-/under- performance. I’ve posted outright markets in HCIX17 and hope to populate some Nov 2017 IC spreads in the next few days.

HCI_NYM X16 10.6/13.6
HCI_CHI X16 60.6/65.0
CHI_SFR X16 -13.2/-6.6

Finally, if you have an interest in trading, I appreciate that even those (limited number of) futures brokers that offer a platform for housing futures, post IC trading spreads. One (new to me) broker that seems to have exactly what an IC spread trader might be looking for is Insignia (www. insigniafutures.com)

Feel free to contact me (johnhdolan@homepricefutures.com) if you have any questions, or if you’d like to discuss any particular IC spread. Restarting IC spread trading is a goal for me in 2015 so I’d love to get something started.

Basics: InterCity Spreads -converted to relative % gains

I continue to believe that while traders may approach outright markets with some caution that they can be more aggressive when expressing views of relative performance. That is, they may not have a precise view about how much the LAX indices might rise over the next year or two but (if their views are consistent with inter-city (IC) spread quotes) they may have stronger views about how much the LAX index will under-perform 9or not!?!) the 10-city index (or some other comparison, e.g. the SDG or SFR indices).

This table organizes IC spreads in a way that converts dollar priced quotes into relative percent gains.

For example, the IC market in HCI_LAXX14 translates into % gains where the -34.4 bid is consistent with HCI index in Nov ’14 being ~1.2% higher than the LAX index, while the the -32.0 offer is consistent with the HCI index being ~2.5% higher. (You need to work out the % gains using the bid and offer on the front contract, the IC spreads and the spot levels for both contracts.)

I’ve highlighted the HCI vs. all ten components for those markets where I am aware of IC quotes that are inside outright bid (the bid side of the front contract)/ offer (the offered side of the second contract) spread. IC spreads are possible (and potentially revealing) within sectors of the country (e.g. BOS v NYM, or LAX v SDG).

I would read from this table that IC spreads are consistent with views that LAX will underperform the 10-city index for Nov ’14, while SFR will outperform across the 3 listed expirations shown.

I’m open to discussing hearing other interpretations, and would encourage traders to form views and post levels on other “pairs”. Feel free to contact me at johnhdolan@homepricefutures.com if you care to discuss some trade ideas.

Using G15 (Feb ’15) contracts to frame 2014 HPA discussions

Anyone wanting to weigh in on the debate as to where home prices are headed for 2014 should have this candle bar graph in mind. I’ve taken this page from the February Recap (see Reports Section) and updated quotes through earlier today (March 5th). The bars represent the bid-offer spread on each of the 11 Case Shiller home price index contracts quoted on the CME expressed as a percent of market price divided by spot price. For example the 188.6 bid in the HCIG15 contract is 4.7 % above the spot 180.13 level. The green bars represent mid-market levels.

Since the G15 contract settles on CS values for Dec 2014, and since today’s spot levels are from Dec 2013, the G15/spot ratio is a great indicator of what this market “thinks” 2014 HPA will be (for the Case Shiller indices).

G15 mid-market levels range from ~+3-9%/spot, a much tighter clustering than the 2013 results (shown below the graph). Excess performance of the California markets is no longer priced in (in fact LAX is about the lowest 1-year forward HPA, while SFR is one of the highest). Much of the slowdown in California prices (and LAV) can be seen by comparing the ratio of 2014 HPA (or mid/spot) vs. 2013 gains. Those ratios range from 20-38%. By contrast some of the areas that had been slowest last year, have some of the highest 2014/2013 ratios (to include CHI @ 56%, NYM @89% and WDC at 62%).

So instead of a “the rich get richer” year, it appears that we’re headed for a “the last shall be first” kind of year.

Now a big qualifier is that the Feb cycle historically has less volume and wider bid/ask spreads than the preceding Nov expiration. For example, the average bid/ask in the Nov ’14 contract is 2.8 points today, while the average for Feb ’15 is 5.4. The open interest of Feb ’15 is 10% of that of Nov ’14. However, given that the Feb ’15 contract lines up with year-end index valuations there’s no reason why we can’t bring (steer) more attention to the Feb ’15 contract. Last month another trader filled out G14/G15 calendar spreads to start discussion on Feb ’15 prices. I’d like to continue that effort.

While many Feb quotes are based on calendar spreads vs. Nov ’14, the range of values in the above graphs suggests some good opportunities for inter-city spreads within the Feb ’15 contract. For example, it appears that quotes are consistent with the notion that SDG will outperform LAX over the next year by ~3%. It appears that NYM will be the best of the 3 Northeast regions. Do traders agree? If not, IC spreads are a way to express such views. I intend to populate (and tout) some such IC quotes later in the week.

If you have any questions, or would like to see some particular IC (or calendar spread linked to G15) discussed or touted, please get in touch at johnhdolan@homepricefutures.com

Feb ’14 (G14) pre Case Shiller #’s

With the February release of the Case Shiller #’s for December 2013 only a few days away (Tues. 2/25 8:15 AM Chicago) I thought that it might be a good time to review quotes for the expiring Feb ’14 (G14) contract. Recall that the settlement prices for the G14 contracts will be the index values announced on the 25th. As such, it can be argued that traders in the front contracts are expressing views on what they think the index values will be.

In quarterly contract expirations over the last 3-4 years traders have tended to bracket the actual Case Shiller index value (i.e. bidding below the actual CS #’s and offering above) on about 70-80% of the contracts. In the other (20-30%) cases the actual Case Shiller values were either higher than than last offer, or lower than the last bid. Sometimes these “outliers” were the result of either very tight bid/ask spreads (e.g. 0.20), index revisions (WDC had 3-4) or just situations were a trader had a strong bid (or offer) that went unchallenged. (There have been contract expirations where all 11 markets bracketed the actual CS #’s and other expirations where 5-6 contracts settled outside the final bid/asks spread, which suggests that surprises are lumpy).

My point is that while the expiring contracts represent expectations of the index numbers to be released, that there have been opportunities for those with strong views of the upcoming Case Shiller values to profit, even on the last trading day of a contract.

Here’s quotes for the G14 contract from yesterday (Thurs Feb 20)

Bid/Ask spreads are slightly on the wide side (averaging 2.3) for this close to settlement. This may be a factor of small open interest (7 contracts) in the G14 series.

Mid-market values are, on average, slightly lower than the Jan. 2014 CS indices (using the CUS change of -0.2%). The “warm region” markets of LAV, MIA, SDG and SFR all have higher mid/Jan values (and LAX is at 0.0%), while the CHI and WDC markets have the biggest percentage drops (and the other “cold region” markets (BOS, DEN, NYM) are all also negative.

Of interest are the changes in the Dec/Jan/Feb values between Dec ’12 and Dec ’13. Some strong markets (e.g. LAX) have seen slower increases over the last few months, while some weak markets (e.g. NYM) are declining at much slower rates.

Feel free to contact me (johnhdolan@homepricefutures.com) if you have any G14 themes that you’d like to have touted. There are a handful of intercity (G14 v G14) quotes working as well as one-year calendar spreads (G14 vs. G15) in all 11 contracts.

Futures markets: post Nov CS release (Edited 10 AM to include table)

The CME futures reacted to yesterday’s release of the September Case Shiller indices by performing what we used to call an accordion market. One side (in this case primarily the offers) was unchanged, while the other pulled away (in this case with bids dropping). We’ll see over the next few holiday sessions whether the accordionists who follow this market, can bring the spreads back closer together.

The drop in bids was prompted by more “surprises” to the downside on Case Shiller numbers than to the upside. Using this table as an illustration, the Case Shiller numbers for LAV and WDC were below recent bid/ask quotes, while only LAX ended up coming in higher than the last offer. I view such outliers as “surprises” as any trader with advance knowledge (or great research) who knew the numbers in advance could have profited by hitting the last LAV bid, or lifting the last LAX offer. Since no trader did so, none had knowledge- hence my categorization of these outliers as surprises.

In addition to the outliers, all seven of the other regional indices (so not counting CUS) came in below the mid-market level, thus adding to the pressure on bids yesterday.

While I note that generally bids were lower and offers flat, this didn’t hold completely true across regions and the expiration cycle. The table below shows the changes in the CUS contract. I’ve also posted a table in the reports section (or link here) showing prices sometime the days before and after the release of the Case Shiller indices across all 11 regions. LAX prices held in, or improved slightly. Across expirations, there was support for various Q14 (Aug 2014 contracts) pushing both CUS and LAVQ14 higher on the day. On the other hand, longer dated contracts were bid 5-10 points lower in typical “get me out” fashion. It will interesting to see if longer-dated offers, who have been posting ever lower prices, will chase these lower bids, or if the bids will rebound to narrow the bid/ask spreads.

There were only a few trades in the CUS and LAV markets. The LAVX16 trade was notable in that a) the LAV contract has had little volume, b) the price 149.80 represents a 66% premium over the low March 2012 LAV index value (so May release) of 89.87, and c) was the result of an inter-city spread trade versus CUSX16. (The climb in the LAV futures price also further reflects the importance of having a view and/or understanding of the impact to an index of changes in the percent of distressed sales and the discount on those sales).

The expiration of the Nov 2013 contract brought a huge drop in open interest (to 81) as all of the CHIX13 trades from the last few months rolled off. But as one door closes, another opens, and, per their schedule, the CME rolled out the new Nov 2018 contract. Three regions had two-sided markets in X18 by the end of the day, all consistent with modest increases in home prices versus 2017 quotes.

I hope to populate other X18 markets today, tweak some calendar spreads, and find other ways to bring bid/ask spreads in closer. That said, I expect most thoughts will be on turkey, family and the weather (at least here in the Northeast). Therefore, I will probably look to compile numbers on Mon Dec. 2 for month-month comparisons.

A Happy Thanksgiving to all!

John

InterCity Spread update: pushing closer

The narrowing in the bid/ask spread in longer-dated California markets (particularly LAX) has been primarily a function of traders offering lower. Those lower offers have also impacted intercity spread quotes, both by narrowing the “arb” level (simultaneous lift one offer in one contract while hitting the bid in another) and by giving IC traders some comfort to narrow their quotes. As a result IC spreads in some longer-dated markets are as tight as I’ve ever seen them.

The table to the right shows a sample of recent IC spreads between the HCI contract (CUS index) and three larger regional contracts. The two-point HCI_LAX X16 IC market of -36.6/-34.6 is the narrowest IC bid/ask spread I can recall on a longer contract in many months. While there are tight markets in both HCIX16 and LAXX16, this IC spread may be of interest to those looking to express a view on the relative value of these two contracts, without taking as much outright risk.

One other point to highlight on the HCI_LAXX16 quote is that if, purely as an example, the spread was traded at -36.6, and #’s such at 206 (for HCI) and 242.6 (for LAX) were used to settle the IC trade, then both components would be ~15.2% over spot level, or about a wash on relative forward performance. This toss-up is a very different state than the last two years when forward California markets have been trading at better implied performance than the CUS 10-city index. For these numbers to give, either home price appreciation will slow in LAX (relative to the CUS index) or other portions of the CUS index (e.g. NYM, BOS, WDC) might have to pick up.

Finally, note that the slowdown in LAX (relative to CUS) does not apply to SFR. The implied percent gains in the HCI_SFR_X16 IC spread are consistent with SFR continuing to outperform the balance of the 10-city index. What makes this curious to me is that some of the rating agencies have punished RMBS deals with San Fran concentrations. Yet, here, this market thinks SFR will do better than the rest of the 10-city index over the next four years. This would seem to open the door to some kind of hedge in RMBS deals to allow San Fran exposure, protect AAA investors, expand the “advance rate” on AAA’s, while taking advantage of the relative bullishness in SFR.

As always, the challenge is that most of these markets are one contract deep (w/ the exception of LAXX16 bid today) and drawing conclusions on such thin markets is iffy. That said, I think that the CME Case Shiller futures, and in particular the IC market, is a great template for having these discussions.

Please feel free to contact me if you have any questions about IC spreads, or care to offer your views. johnhdolan@homepricefutures.com

Updates: Prices/ “Stir the pot: LAX”

I’ve posted a recap of price changes since month-end (through Friday) in the reports section (or here).

Through Friday Nov 11 bids are up and offers lower with most of the bid/ask spread compression showing up in longer-dated LAX contracts (e.g. LAXX17 closed Friday 250.0/258.0 versus 244.2/261.6 at month-end.)

One of the factors helping to reign in LAX spreads is a -39.0/-35.0 intercity quote in CUS_LAX_X16 spreads. The combination of a 3 point bid/ask spread in CUSX16 and the 4 point IC spread means that LAXX16 cannot be wider than 7 points. Thus anyone contributing to tighter (or deeper) CUSx16 markets, or tighter (or deeper) intercity spreads, indirectly contributes to tighter LAXX16 markets. So, even if you don’t have a view on LAX, contributions to CUS can help.

BTW- the CUS_LAXX16 IC spread works out to about a -1%/+1% outperformance of CUS vs. LAX by Nov 2016.

If you have any views on CUS, LAX, or IC spreads, feel free to post quotes and/or contact me at johnhdolan@homepricefutures.com

One graph to cover many aspects of trading in CME Case Shiller futures

The attached graph may be a useful tool for illustrating both absolute and relative value differences in the prices quoted in the 11 different regional Case Shiller (home price index) contracts traded on the CME. I’ve (somewhat arbitrarily) divided the regions into five cold areas (BOS, CHI, DEN, NYM and WDC, to the left), and five warm areas (LAV, LAX, MIA, SDG and SFR to the right), and the 10-city CUS index in the middle.

Each region shows prices (expressed as a percent of spot values) for each of the five November expirations (Nov 2013-2017) in a bar-diagram format. The bottom, middle, and top of each bar represents the bid, mid, and ask level for each contract. The height of each bar reflects the size of the bid-ask spread for that contract.

Note that the graph shows how, at this moment in time, all contracts are pricing in increasing values of the Case Shiller index over the next four years. (Recall that contracts settle on the value of the index released in the month of expiration, so futures prices and index values should converge.) Bids for the Nov ’17 contracts (so not even mid-points) range from 13.6% above spot levels for DEN, to 24.6% above for LAV.

Note that I’m only showing the (relatively more liquid) November expirations to avoid seasonality issues. Other expirations may show seasonal dips in prices.

In general, prices in the warm states reflect more bullishness than prices of the cold states. It’s open to debate whether that relative bullishness is reflective of expected population flows, changes in local economies, foreclosure remediation processes, or just that some of the hardest hit areas (e.g. LAV, MIA) are bouncing back faster.

The warmer states generally tend to have narrower bid-ask spreads (expressed here in percentage terms) Again, that debate might center around local trading interest, lower index value volatility, or other differences in perceived risk.

The CUS and NMM contracts stand out (today) as having relatively narrow bid-ask spreads. The Relative tightness of these spreads may present an opportunity via inter-city spreads for relative value discussions and trades.

Feel free to fire away with any questions related to this graph, or any other aspect of hedging home price indices at johnhdolan@homepricefutures.com

Mid-Month color

With half a month behind us, and now with all 121 contracts having some prices, it might be appropriate to spend a few minutes reviewing recent trends in price quotes for the CME Case Shiller futures. While there have been few trades, there has been some notable price changes.

The following two tables illustrate my notes contrasting recent market and month-end prices. (Three qualifiers-1) these are prices I observed, not necessarily CME quotes at any time, 2) the recent quotes may no longer be current, and 3) the first table is muddy due to my limitations in pasting Excel-generated work into WordPress. There is a higher resolution in the Reports section. Any help in teaching me how to better use WordPress would be appreciated).

Both tables show that there have been better offers in the longer-dated contracts, which has tended to reduce bid/ask spreads- particularly in the California contracts and the off-cycle (e.g. G15, K15, K16) contracts. The lower offers in the X16/X17 contracts are consistent with a switch in expectations of 10%HPA for the next four years, to a reversion to more “normal” home price appreciation. While bid/ask spreads for the front contracts (e.g. 2.8 for Nov ’13) are in-line with past expiration cycles, longer-dated bid/ask spreads remain historically wide (with the exception of CUS and NYM).

Net the price changes seem to be reflective of a willingness for traders to at least make some offers at some prices, which is a notable change from July-August when the markets reflected one-side bullish sentiment.

I would note, and will blog later, that prices in some of the longer-dated California contracts are a function of inter-city spreads. While IC spreads are always a great platform for debating relative strength of one region (or CUS 10-city) versus another (see the CUS/NYM debate in recent blogs), they are especially useful in today’s markets where one leg (e.g. CUS) has a very tight bid/ask spread, and by composition, is highly correlated with another market (e.g. LAX which is ~21% of the CUS index) that has a wide bid/ask spread.

Feel free to ask questions (johnhdolan@homepricefutures.com) and stay tuned for the next blog on examples of inter-city spreads.

Arriving at prices for NYM Nov 2017

There were a number of trades for the NYM region earlier this week including one for the NYMX17 (Nov 2017) contract. While traders would love to see tight markets 4+ years forward (5 when the Nov ’18 contract is rolled out in 2 months) how can one expect narrow bid-ask spreads when so much about possible impacts on forward home prices (e.g. GSEs, interest rates, etc.) is up in the air?

One answer might be that traders are more comfortable with relative prices than absolute levels. While calendar and intercity spreads can each be used for some element of relative value discussions, with this blog I hope to illustrate how using the two separate paths together might help traders get even more comfortable in discussions on distant home prices.

First, here’s a recent graph with prices for each of the 11 expirations (from Nov ’13 to Nov ’17) on the NYM contract. The graph shows higher forward bids and offers over the next four years with sharper gains over the next few months, followed by some seasonal declines (May contracts capture the worst of seasonal factors), and mid-market prices reaching 209.1 by Nov 2017. A 209.1 price is equal to about a 22.3% premium over spot levels (not shown) and a 29.1% premium over the 161.94 value for Dec ’12 as shown in the graph on the right axis. Bears take notice. (Graphs for other contracts are available upon request).

While the 22.3% premium over spot compares a non-actionable mid-market number one can also view and trade calendar spreads to get a sense of the timing of price increases.

The table below shows both mid-market to mid-market levels and percentage differences (highlighted in green) as well as the calendar spread markets for the CUS and NYM contracts in all the Nov/ Nov markets.

As a reminder, a calendar spread is where a trader enters a level where they agree to simultaneously buy and sell two different expirations for the same regional contract. While any calendar permutations are possible (and some allow traders to express views on seasonality) I’m only showing the Nov/ Nov series as a) the November contracts tend to be more liquid, and b) using one-year differences reduces the seasonal impacts that might dominate other spreads (e.g. May vs. November).

Furthermore, recall that the Nov ’13/Nov ’14 NYM calendar spread quotes of -10.8/-8.0 means that the bidder is willing to buy the Nov ’13 contract (X13) 10.8 points below where he would sell the Nov ’14 contract (X14), while the seller would “go the other way” but at an 8 point spread. Since calendar spreads are quoted as the front contract relative to the back, and since forward price are higher, calendar spreads are quoted as a negative number today (as opposed to 2009).

The columns under the calendar bids and offers are my attempt to convert prices into percentage changes. As such, the -10.8 bid is a price difference of 6.2%, while the -8.0 offer is a percentage difference of 4.6%. I will defer you to past blogs (need to post link) that goes into the arguments that these percentage numbers might reflects traders views on HPA (home price appreciation) over the relevant timeframe. Suffice it to say now that one can quote and trade these percentage differences either year-by-year, or over longer periods (e.g. Nov ’13 vs. Nov ’17) to come up percentage differences. As such, traders can debate (via better bids, lower offers, trades) their views on these percentage differences as time elapses.

While these one-year calendar spreads may be useful for viewing percent differences for one year intervals (implied HPA), and while these one-year spreads could be linked to create longer term percent changes, a better way to frame the debate about longer-term price changes is in the longer calendar spreads. (As an aside, the bid and ask for longer term contracts should be tighter than the sum of the annual calendar spreads; e.g. the -39.0 bid for then NYMX13/17 calendar spread is less than the sum (-45.0) of the annual spreads.)

For example, the table below shows the X13/X17 calendar spread markets and some analysis. (Again, I’ve focused on the Nov/ Nov spreads to avoid seasonal issues and to make the math of discounting longer-term percent differences into annual implied HPA.)

Similar to the analysis above once can convert the dollar spreads in the calendar spreads into outright and annualized percent changes.

The problem with distant contracts is that small HPA differences get compounded over time. For example the 1.8% implied difference in annual HPAs (for the CUS contract) translates over four years into a 15 point bid/ask differences in the four-year forward contracts. These wider dollar spreads are seen as an impediment to market liquidity (even though percentage HPA are small).

Bringing in intercity spreads to the analysis can sometimes help further narrow the bid-ask spread discussion.

The table to the right show one way of framing the discussion between a region, in this case NYM, and the CUS/HCI index. Similar to calendar spreads, an intercity (IC) spread is the level at which a trader is willing to simultaneously buy one contract while selling another. In this case the two trades are for the same expiration, but the regions differ. I’ve used NYM here as a) there was a recent trade, and b) since the NYM index represents ~27% of the CUS 10-city index there’s likely to be some strong correlation between it and the CUS index. (That said, one might expect even stronger correlations between like cities e.g. BOS v. NYM, or LAX v. SDG). (Like calendar spreads, all intercity trade permutations are allowable. Some just make more sense than others.)

The table is color-coordinated to help illustrate that intercity quotes (like calendar spreads) are quoted with the first contract relative to the second. So, one biding for the HCI/NYM X17 IC spread at 5.0 is committing to buy HCIX17 5 points higher than where they would sell the NYMX17 contract. (The seller would go the other way, in this example, at 9 points).

I’ve noted the percent change in various futures prices (index levels) relative to the spot Case Shiller index so that one can turn these numbers into a simple question “will the NYM index outperform the CUS/HCI index by Nov ’17, and if so, by how much?” (The answer from today’s quotes seems to be that NYM will mirror CUS performance. Until recently NYM was priced to underperform. The recent trade in NYMX17 seems to have re-focused that discussion).

There could be many ways to interpret this question (these numbers). One could take the above question directly and base their answer on a view toward foreclosure issues that apply to the NYM region (e.g. will inventory take longer to unload in judicial states). In buying NYM/selling CUS, one might alternatively express a view on the remaining portion of the CUS index (of which more than half is California) and express a view on its performance relative to the 10-city index.

Net, the NYMX17 market (of 207.0/213.2 today) has to be consistent with two views: a) that of HPA for NYM over the next 4+years, and b) that of the NYM index relative to the CUS/HCI index. A change in either view might result in a value outside the current range, resulting in a trade(!).

So, NYM traders, take a look at both your HPA assumptions for NYM and think about how you expect NYM to perform relative to CUS. If you disagree with the first there may be a calendar trade for you to do. If you disagree with the second an intercity trade. The tension of both sets of analysis, combined with the recent trade, might serve to keep the NYMX17 bid/ask spread , tight and lead to more trades.

This blog covers a lot of material, some of which is covered in more detail in past blogs. If you have any questions, or would like to discuss how this analysis might apply to other contracts, please feel free to contact me at johnhdolan@homepricefutures.com