Backwardation

A futures curve sloping downward, with dated prices below the spot price - what happens when a good is scarce now and buyers will pay a premium to have it immediately.

Example

A three-month price of 1,972.00 converging to an unchanged spot of 2,000 gains 1.4199% per roll, which is +5.8016% over four rolls.

Important

It is a statement about present scarcity, not about the future. It can persist even where storage and financing are expensive, because somebody who actually needs the good values having it now.

Related terms

• Contango — A futures curve sloping upward, with dated prices above the spot price - the ordinary state of a good that is plentiful and expensive to store.
• Roll yield — The gain or loss a futures holder takes each time an expiring contract is replaced with a later one, as the expiring contract converges to the spot price.
• Cost of carry — What it costs to hold a physical good until a future date: financing on the capital tied up, plus storage and insurance.
• Futures contract — An exchange-traded agreement to take or make delivery of a stated quantity of a good on a stated future date, held on a deposit far smaller than the notional amount.

Lessons that explain it

• The curve, and why a fund can lag the price it tracks — Spot is set by physical supply and demand. Everything dated is set by the cost of carrying the good to that date - and when the curve slopes upward, a fund that holds contracts loses money every time it rolls, even with the price standing perfectly still. (12 min)

All 578 terms in the Investing glossary