Bund Bobl Schatz Fly

N

novish

Hi there,

Is there anyone kind enough that would be willing to spend a few minutes explaining the basics for me regarding the bund-bobl-schatz butterfly? Ive just started trading and so far its been going ok. My initial overall feeling regarding the fly is that it is very hard to estimate where its gonna go next and what drives it either up or down. Im basically waiting for it to go 10-15 ticks one why and then get in and hope for the best/that it will come back to where it was so I can make a few ticks on the way.
My initial questions are if there is anyone out there with experience of the fly, what should I be looking for, or watch out for, that indicates where the fly will go. What makes it go up and what makes it go down?

Thanks a lot!

/Novish
 
The belly of the curve will lead on significant changes in market fundamentals, so for example paper will always head into the belly on something like a terrorist attack or out of the blue signal from a central banker. I don't trade the fly but do watch it as an indicator.

Here's an old post from 2005


The spread tends to shift significantly higher when the market is anticipating, or in the wake of, an unusual but significant market event. That is the curve itself shifts more than two standard deviations from its average position of -19.8bp on significant shocks, although it tends to shift one standard deviation wider on the fear of significant shocks.

http://www.elitetrader.com/vb/showthread.php?s=&threadid=49386&highlight=butterfly
 
It's a very complicated dynamic. There's lots of views and no consensus.

One of the interesting things I used to do is look at the 2s5s10s fly vs economic indicators, such as IFO/ZEW. More specifically, you can try regressing 2s5s10s on the slope of IFO (Expectations Index - Headline). However, this might be only of use for more macro-fundamental, longer-term trades.
 
Thank you so much for posting your tips and ideas on this matter. All help is wanted and I will look up your leads!
 
You can also look at the shape of the Euribor curve versus the Eurex fly.

Like the Eurodollar, the Euribor is essentially a sovereign zero-coupon 'hybridized proxy' (my definition), and of course the Eurex curve dirty prices include a coupon payment - the Eonia is the wildcard factor. Eonia is essentially the European repo market which defines the major cost factor for positive basis 'cash-and-carry' traders.

And now you know why serious fixed income traders usually have a Bloomberg terminal on their desk!
 
Quote from novish:

Hi there,

Is there anyone kind enough that would be willing to spend a few minutes explaining the basics for me regarding the bund-bobl-schatz butterfly? Ive just started trading and so far its been going ok. My initial overall feeling regarding the fly is that it is very hard to estimate where its gonna go next and what drives it either up or down. Im basically waiting for it to go 10-15 ticks one why and then get in and hope for the best/that it will come back to where it was so I can make a few ticks on the way.
My initial questions are if there is anyone out there with experience of the fly, what should I be looking for, or watch out for, that indicates where the fly will go. What makes it go up and what makes it go down?

Thanks a lot!

/Novish
More...

I am in the same boat as you are , i reserached on this a lot but could not come up with anything, so finally i concluded that buy/sell at at exreme of range.
Few things though i do look at

Have a look at german cash 2-10s & see if any significant steepening/flatenning is taking place, on all days this fly has become directional there was significant moves in 2-10s, although it depend on high 2-10s move e.g today 2 is underperforming & 2-10s is flatter 5 is more on 10s side & hence the fly is trading lower, on earlier occasions i have seen 2-10s flateening & fly going higher by 40 ticks with no retrace.
Main thing if 2-10 move siginficantly then how they do & which side 5 is.

I look for cash here, though 10 mins delayed but best i have
http://www.bloomberg.com/markets/rates/germany.html
 
Quote from TsunTzu:

Your looking to trade the 2's10's spread using delayed cash yield quotes?

Good luck, I think you will need it.
More...

You got me wrong , all i said was that i pay attention to German 2-10s to gauge any chances of Fly becoming directional.
No i dont trade 2-10s.
 
Quote from bone:

You can also look at the shape of the Euribor curve versus the Eurex fly.

Like the Eurodollar, the Euribor is essentially a sovereign zero-coupon 'hybridized proxy' (my definition), and of course the Eurex curve dirty prices include a coupon payment - the Eonia is the wildcard factor. Eonia is essentially the European repo market which defines the major cost factor for positive basis 'cash-and-carry' traders.

And now you know why serious fixed income traders usually have a Bloomberg terminal on their desk!
More...

how do you define serious?
 
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