Just because its only you two speaking, doesn't mean others aren't listening 
p.s. I would contribute if I could
p.s. I would contribute if I could
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Yield spread using Bond futures
- Thread starter NAVEEVIa
- Start date
Well I have been talking to some people who are borrowing about 5 million $C to purchase assets with a 12 to 15 year life span.
What I have suggested is financing with short term rates and using part of the savings to buy options to protect against and up move in short term rates.
Would a delta of 3 million be enough to get a bank dealer interested? Could I get a comparable IV to eurodollar options?
What I have suggested is financing with short term rates and using part of the savings to buy options to protect against and up move in short term rates.
Would a delta of 3 million be enough to get a bank dealer interested? Could I get a comparable IV to eurodollar options?
Well, that's what all the banks are doing and making a killing on it, so it's a good idea, if you can get a nice yield pickup on your long-dated assets.Quote from zf trader:
Well I have been talking to some people who are borrowing about 5 million $C to purchase assets with a 12 to 15 year life span.
What I have suggested is financing with short term rates and using part of the savings to buy options to protect against and up move in short term rates.
Would a delta of 3 million be enough to get a bank dealer interested? Could I get a comparable IV to eurodollar options?
There are two questions for me:
1) Whatever you do in options, you won't be able to do it far enough to avoid some duration risk. So, the question is, over what term do you want to hedge your rates exposure? Liquidity in options won't let you go very far.
2) If these are yieldy assets, maybe you want to just do a swap with the people funding you, which would fix your rate for the entire term (you could also consider swaptions). Then you don't run any rate risk at all and just pick up the yield differential on your asset vs the fixed swap rate (funding roll is still a risk and you have to be VERY careful with the details of the trade, or you'll end up like Jefferson County).
Anyways, feel free to PM me if you like. I recommend you do lots of due diligence and digging...
Naveen, firstly, to avoid ambiguity with abbreviations, let's use NTR for on-the-runs and FTR for off-the runs.Quote from NAVEEVIa:
Have been following basis for both cash OTR & CTD bonds direction & magnitude of change is very close for ZT & ZF but for ZN the variation is more this is yesterdays chart ZN CTD & Cash OTR basis in dollars for 1 contract.
Next chart is US OTR yield spread( in %) with ZT ZF spread in ratio 1-1 in dollars overlaid on it.
By using ratio 1-1 we are actually giving more weight to ZF, this very closely follows 2-5s spread, i was thinking of doing something similar with2-10s, giving more weight than DVO1 based to ZN.
What do you guys say?
BTW anyone here daytrade yield spreads(2-5s, 2-10s) like this either thru cash or futures, if yes please shre your views.
I think what you're doing sorta makes sense, but you should really be careful...
Taking your 2s5s example. As you point out yourself, you should plot the 2s5s NTR yield spread vs the 2s5s expressed in contract price terms, but you must use the right weights (should be 0.82 for Sep contracts). Otherwise, what you'll be seeing in the price chart will be contaminated by outright mkt moves (while it's a small effect, it's a matter of principle). The OTR yield spread chart, on the other hand, is outright duration neutral, by definition.
As to the basis question, I am not entirely sure what you're doing. Is this gross basis you're showing? Can you give specifics, i.e. what are you plotting, which bond, etc?
Quote from Martinghoul:
Taking your 2s5s example. As you point out yourself, you should plot the 2s5s NTR yield spread vs the 2s5s expressed in contract price terms, but you must use the right weights (should be 0.82 for Sep contracts). Otherwise, what you'll be seeing in the price chart will be contaminated by outright mkt moves (while it's a small effect, it's a matter of principle). The OTR yield spread chart, on the other hand, is outright duration neutral, by definition.
You are correct the ratio is inaccurate , but 0.82 ratio will mean buying 100 ZT & selling 82 ZF, the smallest ratio will be 5 ZT & 4 ZF, See attached chart. What i have observed is that changes in basis for NTR & CTD are very close for 2yr & vary as maturity increases so 10 yr NTR basis may vary by 10 units whereas CTD basis only varies by 2 units.They may also not move in same direction. So i thought one should give more weight to higher maturity bond future for it to closely match 2s5s yield curve.
As to the basis question, I am not entirely sure what you're doing. Is this gross basis you're showing? Can you give specifics, i.e. what are you plotting, which bond, etc? [/QUOTE]
Now i am calculating basis using this formula
basis= Cash bond price - Conversion factor*Futures price
this is converted to decimals.
Current 10 yr NTR
3.625 coupon 15-08-2019 maturity bond trading at 101 16+,
CF is taken as published by CBOT is 0.8265
ZN is trading at 117 30+
Basis=101.5156-0.8265*117.9844=4.0014
This is basis in decimals for 1 bond , i multiply by 1000 for 1000bonds & get basis in dollars as 4001 Dollars which is what you see in chart as white line with scale on right side.
CTD bond is 5 1/8 maturity 15-05-2016 maturity bond currently trading at 112 31+, CF 0.9535, using similar calculation i get value around 500 dollars.
The basic idea was to plot these & make sure that both NTR & CTD basis are moving in same direction & magnitude so that one can use futures to take yield spread positions while betting on NTR yield spreads. Till now this has not been much help maybe as i dont know how to interpret these numbers.
OKI-DOKI...
1) I see what you mean. Personally, I always prefer to do the analysis using the correct setup (i.e. ratios, etc). When and if the analysis leads to an actual trade, I note if/how the way I express the view differs the from what's suggested by the analysis. Whatever additional risks end up in the trade, I make sure to monitor them very carefully. In the case of your 5 ZT vs 4 ZF, what you have is a very tiny long that you need to be aware of.
2) Yep, what you're seeing here demonstrates why gross basis doesn't quite reveal the whole story. Problem is that at the moment all the currents are trading pretty much universally special in repo (more the 2s and the 5s than the 10s; see the attached table). The effect of the repo on the price gets bigger as the duration of the bond increases. That's why the gross basis difference you're seeing between the NTRs and the CTDs is so much bigger for the ZN than for the others.
Hope this helps... You should really take a look at Burghardt, Belton et al's excellent excellent 'Treasury Bond Basis'.
1) I see what you mean. Personally, I always prefer to do the analysis using the correct setup (i.e. ratios, etc). When and if the analysis leads to an actual trade, I note if/how the way I express the view differs the from what's suggested by the analysis. Whatever additional risks end up in the trade, I make sure to monitor them very carefully. In the case of your 5 ZT vs 4 ZF, what you have is a very tiny long that you need to be aware of.
2) Yep, what you're seeing here demonstrates why gross basis doesn't quite reveal the whole story. Problem is that at the moment all the currents are trading pretty much universally special in repo (more the 2s and the 5s than the 10s; see the attached table). The effect of the repo on the price gets bigger as the duration of the bond increases. That's why the gross basis difference you're seeing between the NTRs and the CTDs is so much bigger for the ZN than for the others.
Hope this helps... You should really take a look at Burghardt, Belton et al's excellent excellent 'Treasury Bond Basis'.