Using the Eurodollar Synthetic Forward Curve for Short-Term Bond Spreads
Summary
The discussion explains the Eurodollar Synthetic Forward Curve as a futures-implied curve that can serve as a reference for short-maturity bond analysis. It is built from Eurodollar futures prices, which imply forward rates. In the cited ABS convention, fixed-rate bonds with a weighted average life below two years may be quoted against EDSF, while longer bonds use swaps and floating-rate bonds use discount margin.
The answer notes that the futures-implied curve can look smoother than observed short-term swap rates, which may contain kinks. That difference helps explain why analysts may select EDSF for projecting floating coupons or calculating a bond spread measure, even though an actual interest rate swap is priced from observed swap rates. The exchange provides a market convention and qualitative curve comparison rather than a full construction recipe. It does not settle whether a convexity adjustment is needed, so users would need to define their pricing purpose and conventions before building or applying the curve.
Key ideas
- EDSF is derived from forward rates implied by Eurodollar futures prices.
- Some ABS market conventions use EDSF for short weighted average life fixed-rate bonds.
- Observed short-term swap rates can differ from the futures-implied curve and may show kinks.
- The benchmark chosen can depend on whether the task is bond spread analysis, coupon projection, or swap pricing.
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Full text
# Bond quotes to EDSF # Bond quotes to EDSF I am having a hard time understanding what "EDSF" (Eurodollar Synthetic Forward Curve) represents as a bond pricing benchmark. I have seen bonds quoted as spreads to EDSF with maturities < 2 years instead of treasury notes, and this seems to be a common convention in the ABS market. Here is a footnote from a recent Wells Fargo consumer ABS report > EDSF used to price fixed-rate bonds with WAL < 2.0 years, swaps >= 2.0 years. Discount margin (DM) to price floating-rate bonds. Source: Wells Fargo Securities Bloomberg has an EDSF function, but this just calculates implied forward rates given ED futures prices. What is the "EDSF" benchmark rate used for spreads? I assume it is some sort of I-spread but I am confused by the "forward" aspect as pricing is generally just against a spot yield. And do you have to apply a convexity adjustment (assuming no since that is model dependent)? If someone can help me with the math here that would be helpful- I am trying to calculate the EDSF rate (or build a curve) so that bonds can be priced off of it. ## Answer by Dimitri Vulis (score 1) https://quant.stackexchange.com/a/53578 The EDSF rate is the rate derived from the Eurodollar Synthetic Forward Curve. Type EDS on your Bloomberg terminal. Most of the time, unless the markets are very anomalous, you see two strikingly different USD curves up to 2 years. The swap rates implied by the ED futures look much "prettier" than the swap rates actually observed in the market (S23 30/360 v 3M libor). The latter have weird kinks in the first 2 years. Later, between 2 and 10 years, the curves are not that different. You'd still use S23 to price an actual 2-year IR swap (e.g. in SWPM); but in other contexts, for example projecting floater coupons from libor rates implied by the curve, or calculating Z-spread or discount margin of a bond maturing in less than 2 years, many people look at this graph and choose to use the futures-based curve rather than the actual observed swap rates.
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