Investors should buy September Eurodollar futures contracts because the recent increase in the rate banks say they pay for three-month loans in dollars may have gone too far, according to JPMorgan Chase & Co.
Banks’ need for dollar funding in peripheral European nations such as Spain and Italy is less than the market understands, according to a note today from JPMorgan strategists Terry Belton and Alex Roever in New York. They assigned a 99.45 “near-term target” price for the September contracts, which traded today at 99.245.
The cost of borrowing dollars for three months, known as the London interbank offered rate, or Libor, was 0.5378 percentage point today, according to the British Bankers’ Association, up from 0.2519 percentage point March 3. It touched a 10-month high of 0.5384 percentage point on May 27.
“Absent broader contagion of the sovereign-debt crisis into core Europe, last month’s move in forward Libor is overdone,” Belton and Roever wrote. “Our base case remains that this broader contagion is unlikely.”
While banks in the U.K., Germany and Switzerland have combined dollar-funding needs of an estimated $600 billion, Spanish banks have a negative $100 billion need, Belton and Roever wrote, citing data from the Bank of International Settlements.
Banks in peripheral European countries would respond to higher Libor rates by seeking funding in euros, limiting the contagion into the dollar Libor market, Belton and Roever wrote.