What is the return on investment like for the Treasury basis trades?

[ecoscien]

Hello,

To those of you who are experienced in the Treasury basis trades, I have a newbie question:

What is the return rate on investment like for these trades? I have read how these trades are done in a book but it seems to me to be a tiny profit/loss compared to the notional amount of bonds involved.

Say, if I am selling short the futures contract and buying the bonds, does that mean that I will receive as much money from the sale of the futures contract immediately ( I thought the buyers of futures contracts don't put up the full amount) as I would need to buy the bond? So theoretically I have no need to put up any initial capital?

If you only want to do it on the end of contract delivery dates, how often can you trade and what kind of annual returns can you get?

Thanks a lot for your answers!

Eco

 

[invertedCurve]

you can not trade basis on your own, Basis trading is spreading cash vs. futures and as an individual you can not trade cash. Well you can if you have a lot of money (Fund) and use an FCM who trades cash to clear it I guess. That trade due to the recent volatility and thinness of the markets both futures and cash has become to dangerous and costly. There used to be a push and pull in the trade as to whether it was the curve or the outright and now it is all curve so you really have no control and the trade is in control of those who can and do steepen and flatten the yield curve which is what you trade when you trade cash. I traded that for a couple of years and trade both cash and futures outright now. Your return is based on a lot of factors such as the size you trade and the carry factor which is something else. Something that is done usually by banks, hedge funds and big prop houses in Chicago, NY and London.

Basis trading is an arbitrage strategy usually consisting of the purchase of a particular security and the sale of a similar security (often the purchase of a security and the sale of a corresponding futures contract).

Basis trading is done when the investor feels that the two securities are mispriced with respect to each other, and that the mispricing will correct itself such that the gain on one side of the trade will more than cancel out the loss on the other side of the trade. In the case of such a trade taking place on a security and the futures contract, the trade will be profitable if the purchase price plus the cost of carry is less than the futures price. It is also called cash and carry trade.

 

[EquityGuy4321]

Inverted is correct. Also, desks within a bank (such as the Repo or Treasury desks) tend to do these trades because they have a natural advantage of not crossing bid/ask. They can get into a favorable basis level based on customer flow. And many times since the pnl they are looking to squeeze out of the trade is only the equivalent of 4 or 5 futures ticks (or less), this edge makes it worth it.

 

[Bernard111]

Quote from EquityGuy4321:

Inverted is correct. Also, desks within a bank (such as the Repo or Treasury desks) tend to do these trades because they have a natural advantage of not crossing bid/ask. They can get into a favorable basis level based on customer flow. And many times since the pnl they are looking to squeeze out of the trade is only the equivalent of 4 or 5 futures ticks (or less), this edge makes it worth it.

What does it mean " because they have a natural advantage of not crossing bid/ask" ?

 

[kefsurfer]

I spent several years with this trade. The carry is only a factor if you keep the spread on over night. If you are long the basis (i.e. long cash short futures) at the end of the day on Thursday it is possible to unwind the trade a few hours later when Tokyo opens and still get paid a three day carry and be flat through the weekend. This however is a totally different trade. Unwinding at the same spread is not always easy in a thin market.

As stated earlier this is not a trade for newbie’s. With that being said it is not a bad idea to chart the basis spread and use it to scalp around. Many basis traders use the spread as defense but are really looking for scalping opportunities on both sides.

It is much harder to do but in the past I made a living off 1/2 and 1 tick scalps and basis trades. It was a game of size, speed and volume. The black boxes have now eaten up the crumbs.