Spreading 2s and 10s

[killATwill]

Question for rates traders. Am I right to assume that a spread trade to capitalize on an inverting yield curve would go short 6 x ZT and long 1 x TN (ultra) ?

How much is 100 basis points of inversion in this scenario worth, in terms of dollars?

 

[xandman]

You want to configure the ratio to give you equivalent tick sizes, do you not? (and , notional value). Otherwise, the price will not have a linear relationship.

ZT tick size is $15.625
TN tick is $32.5

So, 2x1 ZT-TN spread for a tick of $32.5 per 1/32th or 3.125 bips....

 

[killATwill]

Thanks for the reply. CME's website gives the formula below from this link:
https://www.cmegroup.com/education/...spreads/trading-the-treasury-yield-curve.html

Spread Ratio (SR) = BPVultra-ten ÷BPV2-year

I'm getting a BPV of 21.75 for ZT and a BPV of 127.9 ZN (as opposed to TN)

Which would put the ratio at ~1:6.

But maybe my math is wrong?

I think the base unit for this trade is BPV not ticks.

You want to configure the ratio to give you equivalent tick sizes, do you not? (and , notional value)

ZT tick size is $15.625
TN tick is $32.5

So, 2x1 ZT-TN spread for a tick of $32.5 per 1/32th or 3.125 bips....

 

[xandman]

Thanks for the reply. CME's website gives the formula below from this link:
https://www.cmegroup.com/education/...spreads/trading-the-treasury-yield-curve.html

Spread Ratio (SR) = BPVultra-ten ÷BPV2-year

I'm getting a BPV of 21.75 for ZT and a BPV of 127.9 ZN (as opposed to TN)

Which would put the ratio at ~1:6.

But maybe my math is wrong?

I think the base unit for this trade is BPV not ticks.

No, your formula is the standard. I guess they have different notional values as to why my math doesn't hold. Don't even give me those numbers. It will haunt me if they are equal.

 

[CannonTrading_Ilan]

My colleague John Thorpe has the following insight/ personal opinion to share:

The CME lists the recognized spread as follows. With a 4-1 ratio . seems to me with yesterday’s settlement 2yr yield @@W 1.18 and the 10 yr @ 1.81 you should be long the 10 yr and short the 2 yr

If you’re a pure interest rate hike guy/gal simply short the 10 yr. Per US Treasury .gov the yield on Jan 25 as follows : the 2yr 1.02 and on the 10yr 1.78 a difference of .16 and .03 respectively during that time the futures moved down 11.25 points for the 2 year and down 16 points for the Ultra 10 , both the cash and futures moved as you would expect for the inverting curve so had you placed at trade on the close on the 25th using the approved CME Ratio.. between the 25th and the 27th close you pick up 11.25 x 4 x 31.25 = $1406.25 and give back 16x 1 x 31.25 = $500.00


You net is $906.25 less any fees..

 

[killATwill]

Thanks Ilan!

My colleague John Thorpe has the following insight/ personal opinion to share:

The CME lists the recognized spread as follows. With a 4-1 ratio . seems to me with yesterday’s settlement 2yr yield @@W 1.18 and the 10 yr @ 1.81 you should be long the 10 yr and short the 2 yr

If you’re a pure interest rate hike guy/gal simply short the 10 yr. Per US Treasury .gov the yield on Jan 25 as follows : the 2yr 1.02 and on the 10yr 1.78 a difference of .16 and .03 respectively during that time the futures moved down 11.25 points for the 2 year and down 16 points for the Ultra 10 , both the cash and futures moved as you would expect for the inverting curve so had you placed at trade on the close on the 25th using the approved CME Ratio.. between the 25th and the 27th close you pick up 11.25 x 4 x 31.25 = $1406.25 and give back 16x 1 x 31.25 = $500.00


You net is $906.25 less any fees..

View attachment 276724

 

[xandman]

Thanks Ilan!

So, your source of BPV's is not timely enough? They just update the ratios. I still don' t quite know how you could do a back-of-napkin for a 100 bips move. Put the spread on a ladder that shows pos val increments. I don't think it is a linear change....that's bonds for ya.

 

[killATwill]

I'm saying thanks bc from my understanding he was providing another perspective, and I'm grateful for it. Helps me question my own approach and correct if wrong.

I think my source for BPV was fairly correct, but the inputs did contain an estimate.

I agree w you wrt the 100 bips move calculation.

 

[xandman]

I'm saying thanks bc from my understanding he was providing another perspective, and I'm grateful for it. Helps me question my own approach and correct if wrong.

I think my source for BPV was fairly correct, but the inputs did contain an estimate.

I agree w you wrt the 100 bips move calculation.

No, need to explain. I am not the jealous type. "They just update the ratios" or "They" is the CME which Ilan source, I believe. Those are swell guys at Cannon and with a broad/complete offering. Anyway, we are getting weird with the over courteousness.

Best of luck on that spread. Feel free to wax and wane on your trades on ET.

 

[killATwill]

Will do.

I'm thinking the best way to structure the trade is actually through eurodollar futures since you can pair legs 1:1 right now, and they're highly liquid at far-out maturity dates.

No, need to explain. I am not the jealous type. "They just update the ratios" or "They" is the CME which Ilan source, I believe. Those are swell guys at Cannon and with a broad/complete offering. Anyway, we are getting weird with the over courteousness.

Best of luck on that spread. Feel free to wax and wane on your trades on ET.