While the jury seems to still be out on a similar question I posed earlier: Why did Greenspan think rate hikes would increase treasury term premiums?, I have recently begun entertaining an entirely different explanation for the decoupling of treasury term premiums and Fed rate hikes: the growth of eurodollars. With no central governing body, it seems exact market sizing is not possible/maintained or published. The most recent cited sizing in the wiki was for 2016, with a readout of: USD13.8tr -- a truly colossal figure for the time.

Eurodollars have been around for awhile, of course, are are one of the most prominent fixtures in global finance. But it never occurred to me until recently that eurodollars could explain why yields could stay low despite what the Fed did with its rates. To me, having such a huge supply of US dollars outside the purview of the Fed would mean that corporates and the buy-side in general don't have to price in drastic adjustments because the Fed is tinkering with its policy instruments: there's a giant pool of virtually the same stuff right across the pond (and the Pacific).


Might not "Greenspan's conundrum" be more persuasively explained by the shear size of the eurodollar market? Why/ why not?


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Too long for a comment I am afraid.

Maybe I misunderstand something, but ED are essentially short term. So if the FFR (contrary to what Greenspan expected) does not affect long term rates, why should ED?

If you look at ED (actual 90d as well as futures), you see that they very closely follow the path of the FFR.

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This is expected, as ED are mostly short term; from overnight to six months). The rate in ED futures is the three-month London interbank offered rate for spot settlement on 3rd Wednesday of contract month. 3m Libor is almost "entirely" driven by the OIS rate (ignoring that there is a Libor OIS spread as it's immaterial here). Moreover, non-US banks which operate in the ED market; extend dollar-denominated loans and create dollar deposits; need nostro accounts in American correspondent banks to clear and settle their dollar-denominated transactions.


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