eurodollar and TED

[bone]

Hi,
I understood the basics of TED and can trade with cash bonds. But i am facing problems while trading it with futures. The 2yr t note futures contract denotes 2 months forward 2yr ctd yield. Can i directly enter into trade with futures while looking at the chart with cash treasury bonds?? Or is there a better way to look at the spread with treasury futures ?

Amit Goyal

Are you looking to enter into a true hedged spread trade ( in this case a basis trade cash vs futures ) or is your honest intent to scalp one based upon the movement of the other ?

 

[goyalamit1984]

I am looking for a true hedged trade

 

[bone]

Sure, you buy one and sell the other. You can leg them manually ( which requires considerable tradecraft in that you don't want to give up four bid/ask to execute the round turn ) or you could use something like CQG or RTS or TT AutoSpreader to automate the process ). Make sure that the cash instrument you are looking at is listed by the CBOT as deliverable into the particular futures expiry ( CME website ).

Obviously there is more to it than I could possibly describe in one brief forum answer, as you should be aware of many other factors that influence this trade, such as the overnight repo rate. But I wanted to provide at least a very rudimentary and highly qualified " Yes" to your question.

A good thing is that the better futures platforms and FCMs will allow you electronic access to Brokertec and CF cash markets which makes execution more convenient. For basis trades, and the short duration products in particular, execution efficiency is the key IMHO. This is a very competitive and automated trade.

 

[Martinghoul]

2y cash bond is a decent proxy. If it's not good enough, you can look at the chart of what's known as an "invoice spread" (i.e. futures vs matched-maturity swaps). That's probably the closest, although there are still some discrepancies. I am not really sure what basis has to do in the context of trading cash bonds/bond futures vs Eurodollars.

 

[bone]

Decent Overview:

http://kawaller.com/pdf/tedrev.pdf

Starting on page 15:

http://www.cmegroup.com/trading/int...lar_Futures_Interest_Rate_Building_Blocks.pdf

 

[goyalamit1984]

Hi,

I was trying to calculate the yield of the CTD bond from futures price.
I multiplied futures price by conversion factor of the CTD bond.
To this adjusted futures price i applied the excel function yield()

I have few questions related to this

1) In entering fields to this function what should be the settlement date ?
T + 1 settlement ( as in the cash futures ), Notice day of the futures contract , Expiry date of the futures contract
2) The yield i get from this function - is it comparable to the forward yield of the CTD bond

3) If i getting the huge difference in CTD bond cash yield and this yield , what does this signify ?? higher yield from adj FP indicates a pricing of a rate hike ??

Thanks and Regards
Amit

 

[Martinghoul]

Hi,

I was trying to calculate the yield of the CTD bond from futures price.
I multiplied futures price by conversion factor of the CTD bond.
To this adjusted futures price i applied the excel function yield()

I have few questions related to this

1) In entering fields to this function what should be the settlement date ?
T + 1 settlement ( as in the cash futures ), Notice day of the futures contract , Expiry date of the futures contract
2) The yield i get from this function - is it comparable to the forward yield of the CTD bond

3) If i getting the huge difference in CTD bond cash yield and this yield , what does this signify ?? higher yield from adj FP indicates a pricing of a rate hike ??

Thanks and Regards
Amit

1) The settlement date should NOT be T+1. It should be the futures delivery date.
2) What you get from this function is yield for a given settle date, including for one which is fwd.
3) It could mean a whole lot of things, including the possibility that there's smth wrong with your calc.

 

[goyalamit1984]

Thanks for the reply ..


I have calculated for the two yr T-notes futures .
The CTD bond yield is at around 50 bps
And the yield is getting is around 68-69 bps.

It is coming close to the 2 month forward yield for the 2yr cash bond ( on Bloomberg )


If i want to calculate a bond's price including my expectations of rate hikes how can i do it ??

 

[Martinghoul]

Thanks for the reply ..


I have calculated for the two yr T-notes futures .
The CTD bond yield is at around 50 bps
And the yield is getting is around 68-69 bps.

It is coming close to the 2 month forward yield for the 2yr cash bond ( on Bloomberg )


If i want to calculate a bond's price including my expectations of rate hikes how can i do it ??

Your fwd bond yield seems a little too high. I am seeing smth closer to 59bps, with the CTD yield of 52bps or thereabouts.

It's quite tricky to calculate a bond's price that includes rate hike expectations, even using basic techniques. Remember for a 2y bond it's not just hikes that matter, it's also when these hikes actually start happening. You can try and do the calc by decomposing the bond yield into individual fwd rates that are affected by the hikes.

 

[goyalamit1984]

I was going through a report by morgan stanley. I read the following trades
Trade Recommendations
 Pay GBP 5y – target 2.6%;
 Pay GBP 2s5s – target 115bp;
 Pay GBP/Euro 3y2y – target 220bp;
 Buy 3mth into 2y ATM rec versus selling 3mth into 5y 3bp
OTM rec for zero cost.

Can anybody please explain what all these terms mean

Thanks
Amit