Dude, you're looking at a single specific issue! Of course, a specific cash bond has nowhere near the liquidity of futures. Just think about it this way: current 10y bund (3.5% Jul 19) has a total issue size of EUR13bn; current open interest in Sep9 bund contract is arnd 850k, which gives you arnd 6.5 times more bonds.Quote from NAVEEVIa:
I see the following Bid/Ask on Bloomberg page BBT currently for german bonds, the spread seems high compared to futures
2yr 100.085/100.105
5yr 98.665/98.695
10yr 101.190/101.225
Whats the closing time for german cash bonds?
Quote from Martinghoul:
Dude, you're looking at a single specific issue! Of course, a specific cash bond has nowhere near the liquidity of futures. Just think about it this way: current 10y bund (3.5% Jul 19) has a total issue size of EUR13bn; current open interest in Sep9 bund contract is arnd 850k, which gives you arnd 6.5 times more bonds.
Well, there's a whole lot more US cash bonds out there. For example, issue size for the current 10s is $64bn; open interest on Sep 10yr note contract is arnd 1MM; so the ratio is only arnd 1.5 (actually for my previous bund example the ratio is more like 8.5, 'cause I forgot Finanzagentur retained EUR2.5bn of the issue; so free float is only arnd EUR10bn). Also, the US mkt is structurally different (for historical reasons), so the liquidity differential between cash bonds and futures is very different in the US and EUR mkts (a lot more skewed to cash in US, futures in EUR).Quote from NAVEEVIa:
Got your point, but in case of US benchmarks Treasuries the spread is only 1/2 to 1 tick.
What i want is to be able to follow yields of german benchmark bonds on 2- 5 & 10 yr maturity.
My simple idea is that futuresbased spreads should reflect changes on cash bond yield spreads.
Do you think basis risk can be as significant as to alter this relation?
Moreover, I just realized smth... Why are we comparing futures with current on-the-runs? The OTR bond might not even be in the basket, so it's completely apples and oranges.Quote from NAVEEVIa:
Got your point, but in case of US benchmarks Treasuries the spread is only 1/2 to 1 tick.
What i want is to be able to follow yields of german benchmark bonds on 2- 5 & 10 yr maturity.
My simple idea is that futuresbased spreads should reflect changes on cash bond yield spreads.
Do you think basis risk can be as significant as to alter this relation?
Quote from Martinghoul:
Also, the US mkt is structurally different (for historical reasons), so the liquidity differential between cash bonds and futures is very different in the US and EUR mkts (a lot more skewed to cash in US, futures in EUR).
This is probably the most exhaustive reference you will find, but it's sorta expensive, I guess, for a book:Quote from NAVEEVIa:
Can you elaborate on the possible reasons for the above.
My point was to compare US cash with german cash. If the Bid/ASk spread is as wide then one maybe losing 1-2 bps when doing curve tradeslike 2-10s in German cash.
Also whats the average daily turnover in german bonds, for US i could find
http://archives1-sifma.org/story.asp?id=1209
It seems its atleast 200-300 Billion dollars a day, what about german. there are some good artices here on US cash http://www.newyorkfed.org/research/capital_markets/index.html
Can you give some good literature on german bonds trading.
Regards
Naveen
This is not exactly the liveliest conversation, Neveen, as it seems I'm the only one willing to offer an opinion.Quote from NAVEEVIa:
Here are some noob opinions on bond futures, cash & basis
1.Bond futures have a deliverable basket of cash bonds, CTD keeps on changing( How frequently i dont know) & this possibly gives rise to basis trade.
2. For 2, 5 yr futures basis risk should be low since deliverable bond maturity is very close to 2, 5 yrs.
3. Basis trading would make sure that futures follow cash closely.
4. When executing curve trades using futures( 9 out of 10 times) futures based spread follows cash yield spread.
Above maybe nonsense , you can point that out.
Lastly if someone has an edge in predicting yield spread behavior, should he trade in cash or futures , what will be pros & cons of each.
I think futures will be better, more bang for buck+ more price points e.g cash 2 yr at 99 31 & Zt at 108 2, ZT will have more price range. I hope i am clear.
Good Trading
Naveen
Quote from Martinghoul:
This is not exactly the liveliest conversation, Neveen, as it seems I'm the only one willing to offer an opinion.
Do you want me to respond to this again or have you heard enough out of me?
Current contract CTD changes are VERY rare in EUR and GBP, rare in USD. Some funky micro bond games have to be played for a CTD switch to occur (unless, which also happens rarely, there's lots of optionality in the basket). This year the only on-the-fly CTD change I have seen occurred in the Sep Gilt when 5 18s got massively squeezed (but, then again, I haven't focused a lot on US futures, where baskets are larger and I might have missed something). However, CTD switches don't produce the basis. Basis happens simply because the instrument is a future.Quote from NAVEEVIa:
1.Bond futures have a deliverable basket of cash bonds, CTD keeps on changing( How frequently i dont know) & this possibly gives rise to basis trade.
No, basis really doesn't directly depend on the maturity of the bond. It's more a function of the repo mkt, if anything.2. For 2, 5 yr futures basis risk should be low since deliverable bond maturity is very close to 2, 5 yrs.
Yes3. Basis trading would make sure that futures follow cash closely.
Very roughly, but it would all depend on the mkt. Basis is tradable and you can take a view on it. This means that futures and cash bonds CAN get out of whack. This is exactly what happened last fall, when balance sheet constraints (i.e. no appetite for cash bonds) caused all sorts of crazy shenanigans in the basis world.4. When executing curve trades using futures( 9 out of 10 times) futures based spread follows cash yield spread.
It depends. If you have a very strong view on the curve, you may be willing to tolerate the various residual risks that a futures position will inevitably expose you to. Normally these risks are well-contained, but if you were playing with futures last year, you might have gotten all sorts of unexpected (and, probably, unpleasant) pnl surprises. For cash bonds, things are more straightforward, as there's no CTD games, etc.Lastly if someone has an edge in predicting yield spread behavior, should he trade in cash or futures , what will be pros & cons of each.
I think futures will be better, more bang for buck+ more price points e.g cash 2 yr at 99 31 & Zt at 108 2, ZT will have more price range. I hope i am clear.