Deep backwardation in T-Bonds?
- Thread starter crgarcia
- Start date
Backwardation/contango terminology is not used in the rates world. It's all about the slope of the curve and the rolldown.
Also, you have to be a bit more specific about what you're buying and what you're using to hedge.
Also, you have to be a bit more specific about what you're buying and what you're using to hedge.
I wonder if the near term premium represents a flight to quality or inflation concerns. I remember reading about bombings in Indonesia, rioting in China, North Korea testing missiles and California issuing IOU's. Some events might trigger a flight to quality near term.
<img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=2505536 \img>
Martinghoul, you mentioned those terms are not used in relation to bonds, is that to say that barkwardation is not a reliable indicator of anything as may be read into other commodities?
What he was trying to say was that the bond rolls are (to a first approximation) a purely mechanical function of long and short term interest rates. They have nothing to do with "rioting in China" & etc.
Well, I just meant to say that people don't use the words 'backwardation' and 'contango' in the world or rates. I guess equivalents would be 'inverted' and 'steep'. As to what the shape of the curve actually means, that's an entirely different story. Some of it, as Rodney notes, has to do with rate expectations, some with risk premia and convexity, while some is not easily quantifiable and is a function of plain supply/demand. It all depends on the sector (maturity) and the instruments.
One blogger has written about china shifting out of agencies over the last few years into predominantly short term treasuries but also a few long term ones too.
You might want to check that webadress though & erase cookies b4 you go if you are a tinfoil type.
http://blogs.cfr.org/setser/
Similar to the stock index futures premium/discount, it is a function of extremely low short-term interest rates. A professional trader could "borrow cheaply" at the short-term rate, then buy bonds with the loan, short-hedge the bonds with defered bond futures contracts, and then collect bond interest payments at the long-term rate, i.e. "lend dearly", for "free" if the deferred futures are priced properly. The market won't let that happen for very long. 
Actually, if all you're referring to is the spread between U9, Z9, H10 etc contracts, that really doesn't have much to do with the rates, necessarily.
One of the reasons for these positive rolls is just the structure of the deliverable basket. For the 10y note, for example, the U9 contract CTD is the May 16s with a coupon of 5.125%. However, this bond falls out of the Z9 basket and a lower coupon bond (4.875% Augie 16s) takes its place. So the further out futures are cheaper simply because its CTD trades closer to par. This is the case for the 2yr note and 5yr note U9/Z9 rolls also.
This isn't to say that it's always the only factor. Sometimes it has to do purely with pure supply/demand, the richness/cheapness of the CTD in the repo mkt and the plain liquidity of the contract. This is currently the case for the long bond futures...
One of the reasons for these positive rolls is just the structure of the deliverable basket. For the 10y note, for example, the U9 contract CTD is the May 16s with a coupon of 5.125%. However, this bond falls out of the Z9 basket and a lower coupon bond (4.875% Augie 16s) takes its place. So the further out futures are cheaper simply because its CTD trades closer to par. This is the case for the 2yr note and 5yr note U9/Z9 rolls also.
This isn't to say that it's always the only factor. Sometimes it has to do purely with pure supply/demand, the richness/cheapness of the CTD in the repo mkt and the plain liquidity of the contract. This is currently the case for the long bond futures...