Close price and spreads, from Zubin Al Genubi
Why is the close price so much higher than trading at the close? Why is June ES 38 points higher than March ES? That's a really big spread. It must mean something. And to adjust the back data to continuous must remove or affect information.
Justin Klosek responds:
March-June ES spread is due to the difference between the (assumed) dividend rate of the S+P and the risk free rate.
Investor A who owns the portfolio of S&P 500 stocks receives the dividends and the return from the changing stock prices. Investor B who owns the futures and a Treasury bill has (to first order) the same portfolio. He does not receive the stock dividend but instead earns the T-bill rate, which is now higher than the dividend yield. So the futures prices have to adjust to account for this.
If the risk free rate is 4.75% vs a dividend rate of 1.25%, that 3.50% difference is reflected in the futures roll—about 87bp per quarter, or around 38 points, plus/minus.
Kora Reddy adds:
Fisher effect as chair says here:
The Performance of Market Index Futures Contracts
Zubin Al Genubi comments:
Seems it would behoove one to own bonds with the futures to capture the roll. Especially now.
Justin Klosek asks:
Long T-bills plus S&P futures is no different than owning cash stocks…. what drives your “especially now” comment?
Zubin Al Genubi responds:
If FOMC is done at 5 1/4, in 2 increments 3 months apart we are 6 months away from the end of rate increases. Powell's bond "put" so to speak. Yields are high. Seems, like today [22 Feb], the bonds have decoupled from stocks. Why not carry some bonds to support a portfolio of futures? Carry margin is much less with futures than stocks. The overnight market is a big plus of futures over stocks.