GBL Euro-Bund futures curve

[luisHK]

Hi ETers

Anyone could explain why GBL March is at 164.20 whereas GBL DEC is at 162.15 and GBL June lower than GBL Dec.

Does it make GBL March any less desirable than other expirations to take a multi month long GBL position ? I suspect not but it looks weird to me as I'm not familiar with this product.

Thanks in advance for all related input
Luis

 

[Martinghoul]

It's sorta complicated at the moment, especially since the back contracts are not exactly very liquid.

The March contract, in spite of the optically higher price, is actually cheap relative to Dec, on a whole variety of metrics. Jun is probably even cheaper, but I haven't looked at it closely.

 

[Zzzz1]

interesting, I actually had the same question as @luisHK. Do you mind sharing which "metrics" you are referring to? Thanks a lot @Martinghoul

It's sorta complicated at the moment, especially since the back contracts are not exactly very liquid.

The March contract, in spite of the optically higher price, is actually cheap relative to Dec, on a whole variety of metrics. Jun is probably even cheaper, but I haven't looked at it closely.

 

[Martinghoul]

interesting, I actually had the same question as @luisHK. Do you mind sharing which "metrics" you are referring to? Thanks a lot @Martinghoul

The common metric people look at is what's known as the "invoice spread" (that's kind of a US terminology that has been adopted everywhere now). Specifically, it's the spread between the fwd yield of the CTD implied by the futures and a matched-maturity swap (either vanilla or OIS).

So in the case of bunds, the current front contract looks like it's at EONIA-14.7bps. The back contract on the other hand is at EONIA-8bps, i.e. arnd 7bps cheaper. Obviously, the CTDs are different, so it's not a like-for-like comparison, but this is where things get complicated.

 

[luisHK]

Many thanks for ur input Martin, i actually hoped for u to show up in this thread.

 

[Zzzz1]

second that, thanks

The common metric people look at is what's known as the "invoice spread" (that's kind of a US terminology that has been adopted everywhere now). Specifically, it's the spread between the fwd yield of the CTD implied by the futures and a matched-maturity swap (either vanilla or OIS).

So in the case of bunds, the current front contract looks like it's at EONIA-14.7bps. The back contract on the other hand is at EONIA-8bps, i.e. arnd 7bps cheaper. Obviously, the CTDs are different, so it's not a like-for-like comparison, but this is where things get complicated.

 

[CBC]

Just my thoughts, but I thought that there is no yield curve for interest rates via calander.

I thought its always inter commodity. 3yr, 5yr, 10yr.....

Looking at volume for ZN there is almost nil volume for the following contract.

 

[luisHK]

It's hard with ZN to take a position more than 3 months ahead because of the lack of volume and large spreads, at least for those like me who can't calculate the fair value.

Around expiration date GBL has tight spreads 6 months out though, reading Martin's input I should have bought the GBLmarch straightaway at Sep expiration...

Not looking to trade the curve btw, but to establish a long term GBL position, than roll the futures when they reach expirations, the less roll the better, but the value of GBL march looks odd, hence this thread.

 

[Martinghoul]

It's hard with ZN to take a position more than 3 months ahead because of the lack of volume and large spreads, at least for those like me who can't calculate the fair value.

Around expiration date GBL has tight spreads 6 months out though, reading Martin's input I should have bought the GBLmarch straightaway at Sep expiration...

Not looking to trade the curve btw, but to establish a long term GBL position, than roll the futures when they reach expirations, the less roll the better, but the value of GBL march looks odd, hence this thread.

Bunds are a little different to treasuries. The roll starts trading quite a bit earlier, which means that the back futures are tradable well before the maturity of the front contract. Normally, there's all the typical bond relative value games that can be played with the back futures contracts, since occasionally there's juice. The issue at the moment is that everything is mighty complicated by the ECB and the questions around how QE will be modified going forward.

 

[Eurokopek]

Bunds are a little different to treasuries. The roll starts trading quite a bit earlier, which means that the back futures are tradable well before the maturity of the front contract. Normally, there's all the typical bond relative value games that can be played with the back futures contracts, since occasionally there's juice. The issue at the moment is that everything is mighty complicated by the ECB and the questions around how QE will be modified going forward.

Are there specific channels how the ECB decision will move the spread or just heightened volatility that can throw things in disarray?

My guesses would be:
QE programme change: both CTD's are about same issue size, with yields comfortably above depo rate, both non-benchmarks - so roughly same performance whatever the outcome?
Rate cut: same performance for cash bonds, but front contract outperforms (6 cents for a 25bps cut?) cus lower funding costs decrease the forward price (and thus the bund futures price), and with longer "holding" horizon the forward drop is larger for the back contract.

That said, I see a cut as very unlikely. Do nothing or taper the monthly volumes but extend the purchases past march 2017 seem more likely to me. Changing capital key seems slightly less likely, and no way they would lose face with a taper but without a sweetener.