Building USD Yield Curves from Exchange-Traded Futures
Summary
The document considers whether exchange-listed rate futures can support an approximate US dollar yield curve when over-the-counter swaps and cash Treasury prices are unavailable. The instruments discussed include Eurodollar futures, Federal Funds futures, and Treasury futures. The practical objective is to map prices into a lower-dimensional curve representation and study deviations between projected and observed market prices.
The answers caution against directly joining Federal Funds and Treasury rates because they belong to distinct markets and can diverge; the cited historical spread illustrates that difference. For a curve extending within the Eurodollar futures strip, one answer suggests using that strip to represent funding costs. Beyond its maturity range, Treasury futures imply a Treasury-based curve with interpolation if swaps are unavailable. Implied repo and futures-implied cash yields are raised by the questioner but not assessed in detail, and the replies do not specify a full curve-fitting procedure or quantify its errors. The resulting curve is therefore an approximation whose suitability depends on tenor and the rate basis being modeled.
Key ideas
- Federal Funds and Treasury rates represent different markets and should not be spliced without accounting for their basis.
- Eurodollar futures can inform a funding curve within the strip’s maturity range.
- Treasury pricing is a fallback for longer maturities when swap data are unavailable.
- Futures-implied Treasury yields and interpolated curves remain approximations.
- The appropriate curve depends on tenor and the rate exposure being represented.
Tags
Full text
# Creating yield curve from exchange-listed products only? # Creating yield curve from exchange-listed products only? For use in subset of my thesis, I’ve been given some exchange market data for several exchange-listed products, including Eurodollar rate futures as well US treasury futures and Fed Funds futures. I would like to fit an approximate yield curve / multi curve (govt + libor) while explicitly omitting OTC data (e.g. swaps) and cash US treasury data. My goal is to fit these curves to some lower dimensional space then observe deviations of my projected prices from true market prices. Some questions I have: - I can pull implied repo data at the start of each day. Is this stable enough to reproduce real market pricing? To pivot my first credit-risk inclusive future (ED) and/or my first riskless (FF? 2yr treasury future?) off of, I will take the respective spot rate at the start of the day as well. I understand FF is uncollateralized (domestic/reserve-holding) corporation-based yields, which are surely not government. However I don’t really know how else to get short end into my risk-free approach. Is there a better way given the data? - Because I am not using swaps, it’s unclear how I might consider credit-based libor premium. My earliest treasury is 2 years, but I also have Fed funds. I’m not sure if there’s an stripped down modern equivalent that operates under the no-OTC constraints? - Assuming stable implied repos, I can use intraday futures to imply cash treasuries then determine yields from these implied cash treasuries. Does this seem reasonable? Any guidance or advice from the practical side (I’ve never done this before) would be highly appreciated. ## Answer by user42108 (score 1) https://quant.stackexchange.com/a/46978 There is a Fed Funds/UST basis. You can't just 'splice' FF futures and Treasuries - they're two different markets. e.g. over last ~5y, 2y UST/OIS spread has ranged from ~-10 to +30. ## Answer by demully (score 1) https://quant.stackexchange.com/a/57718 To be clear, these are three different dollar interest rates? All US, not EUR, JPY, GBP, CAD etc. cross-currency comparisons? If just USD, how far forward do you need to construct your curve? If more than 5 years, then if you can't source decent swaps pricings, then you are constrained to Treasury pricing. Else if <5y, pricing across the Eurodollar strip is your yield curve! This represents the financing cost of funding any position thus... Beyond 5 years (where the ED strip expires), you have no option but to use a Treasury yield curve (and interpolations therein), in the absence of swaps. For all but the most forensic, highly levered, transactions; this is usually not a problem.
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