Yield spread using Bond futures

[Martinghoul]

Quote from NAVEEVIa:

I have three questions

1. Lets say NY session has started , do you see much variation in these swap spreads( more than 1 bps) e.g. after any major data release like NFP last friday USTs advanced initially as data was bad but did anything happen on swap spread front, anything significant?

Well, there are a few things to consider. Firstly, spreads are affected by the fundamental information embedded in econ releases. Secondly, spreads mechanically have some long-term directionality, i.e. they move with the mkt in a particular way. Finally, there are short-term effects that have to do with the lag between the swap and cash bond mkts that can have short-term impact on spreads. It's difficult to be more specific, because the actual nature of these relationships constantly shifts.

2. Does the change in cash UST yield curve & implied change in 3 month forward rates anyway influence eurodollar futures?

I assume you mean 3m fwd yields. Well, this is a case of chicken and egg. The two are very much inter-related, because, fundamentally, there's a relatively strong no-arbitrage relationship between the LIBOR instruments, like Eurodollars, and cash USTs. Unfortunately, the core assumption of the no-arb argument is unlimited liquidity and balance sheet. During the normal times, both are not unlimited, but ample, which means that things move mostly in lockstep and swapspreads are relatively stable. Then they are affected mostly by longer-term, structural factors, such as the fiscal situation and issuance patterns. However, when liquidity disappears like last year, all sort of hell can break loose and there could be times when USTs rally while Eurodollars sell off.

3. Whats do people who trade STIR future spreads look at for decision making? IMHO technicals have not much role here.
Naveen

I don't know what 'people' do, to be honest. I think some people definitely look at technicals. I personally don't, but tastes differ.

 

[bone]

In terms of intraday trading importance with the Eurodollar, in terms of relevant fundamentals I would look at the Repo rates off of Bloomberg and the Brokertec and/or Garban Plain Vanilla Swap order books.

Likewise, for the Euribor the Eonia rates are key.

If you are an intraday trader, these are fundamentals which have the most immediate effects. If the repo or eonia rates change the effects for postive basis 'cash and carry' traders is huge and has ramifications for the entire STIR curve.

I have had excellent results with technical modeling for the STIR curve with my clients. GARCH and ARIMA time series are an excellent place to go for the more sophisticated geeks among us.

 

[NAVEEVIa]

Quote from Martinghoul:

I assume you mean 3m fwd yields. Well, this is a case of chicken and egg. The two are very much inter-related, because, fundamentally, there's a relatively strong no-arbitrage relationship between the LIBOR instruments, like Eurodollars, and cash USTs. Unfortunately, the core assumption of the no-arb argument is unlimited liquidity and balance sheet. During the normal times, both are not unlimited, but ample, which means that things move mostly in lockstep and swapspreads are relatively stable. Then they are affected mostly by longer-term, structural factors, such as the fiscal situation and issuance patterns. However, when liquidity disappears like last year, all sort of hell can break loose and there could be times when USTs rally while Eurodollars sell off.
[/B]

Thankyou Martinghoul,
Thats a very clear explanation of what i suspected. I assume current environment as normal & working currently on how to utilise eurodollar futures for yield spread trades.
As pointed out earlier by you I have noticed that using bond futures does expose one to risks which are difficult to assess( simply speaking you may not get the desired result even though your view is correct).

Good trading

Naveen

 

[Martinghoul]

Quote from NAVEEVIa:

Thankyou Martinghoul,
Thats a very clear explanation of what i suspected. I assume current environment as normal & working currently on how to utilise eurodollar futures for yield spread trades.
As pointed out earlier by you I have noticed that using bond futures does expose one to risks which are difficult to assess( simply speaking you may not get the desired result even though your view is correct).

Good trading

Naveen

Best of luck to you, Naveen...

P.S.: I'd also pay attention to what bone mentioned, re repo rates, etc. Those things are important, but much harder to pin down.

 

[ellewood631]

thanks naveevia. this gives more useful information i'm looking for ..