Commodities continue their comeback as supply shocks prevail over demand growth concerns from China. The backwardation (indicative of shortage), measured by roll yield or the excess return minus the spot return, has not only persisted from February into March but increased. March’s roll yield of 26 basis points more than doubled February’s roll yield of 10 basis points, bringing a MTD gain of 14 basis points to increase the S&P GSCI YTD return to 2.9%. While we have seen some backwardation in the past few summers, we have not seen it this early in the year since 2004 – the last year of low inventories until now. In 2004, the S&P GSCI returned 17.3%.
Source: S&P Dow Jones Indices. Data from Jan 1970 to March 2014. Past performance is not an indication of future results. This chart reflects hypothetical historical performance. Please note that any information prior to the launch of the index is considered hypothetical historical performance (backtesting). Backtested performance is not actual performance and there are a number of inherent limitations associated with backtested performance, including the fact that backtested calculations are generally prepared with the benefit of hindsight.
Don’t let the term structure fool you, though. There is a misperception that the term structure determines the total return. While the roll yield is a highly significant attribute to the total return, it is not the only driver. Price return and collateral yield are also included so that sometimes a positive return is realized despite contango. Although on average in this chart, there are no negative average monthly returns with backwardation, it does happen.