Yield Spreads

Real Money

Real Money

Question for traders familiar with yield spreads.

Let's say I want make a fly (to trade or just to monitor). So, I want to

buy notes / sell bonds
AND
sell bonds / buy ultra bonds

This means I bought the NoB spread and sold the BoB spread. Using these ratios

ratios.png


The cash value of all contracts would be given by

5000*ZN - 5000*ZB + 2000*UB

Do any of you guys know what the most common way to weight this type of trade is?

What do you think about these weightings? (or others like this)

Thanks.
 
Use the June 2020 tab for the most current spread ratios:

https://www.cmegroup.com/trading/interest-rates/intercommodity-spread.html

Here's a primer, but don't calculate the ratios yourself - use the CME's ratios in the tab I linked to above. Some of the best information you can find on Treasury Spreads is free from the CME's Education Department. Spread Trading short term interest rates (Eurodollars, SOFR) and longer duration rates (ICS Treasury like 2's, 5's, 10's, 30's, Ultra) account for huge volume on a daily and carried open interest position basis:

https://www.cmegroup.com/education/whitepapers/trading-the-treasury-yield-curve.html

Depending upon your capitalization and how competent your broker's Risk Manager is, you might not be able to trade the exact number of contracts. If you are close but not precise - don't worry, the CME will automatically calculate a SPAN margin credit anyway and assign it to your position. For example, you might not be able to have on a 5:2 but instead might have to use 2:1.
 
Last edited:
bone said:
Spread Trading short term interest rates (Eurodollars, SOFR) and longer duration rates (ICS Treasury like 2's, 5's, 10's, 30's, Ultra) account for huge volume on a daily and carried open interest position basis
More...

Thanks @bone . Let me try to say this again. So let's say the ratios give you 2:1 for BOB, and 5:2 for NOB.

Then the natural weightings would be 1:1 for the BOB/NOB spread (butterfly).

But these weightings in the constructed fly actually imply a 5:1 notes to ultra bonds ratio.

The only thing that worries me is that the NOL spread (notes over ultra bonds) is actually 4:1.

It's a 5:2:1 fly but the NOL spread is 4:1, so I'm theoretically overweight notes?
 
If you want a 10 Yr Notes to 30 Yr Bond to Ultra Bond Butterfly, simple overlap the leg quantity ratios.

The June '20 CME ICS leg quantity ratios for the NoB are 5:2, and for the BoB are 2:1. So, for June '20, the correct 10's-30's-Ultra Butterfly leg quantity ratios would be: 5:4:1. You are either buying or selling the wings in terms of execution.

Just as a side note, typically when I am doing butterflies where the butterfly may not be exchange supported as a spread, I will leg two exchange spreads in order to create the butterfly; in this case, the NoB and the BoB.

Real Money said:
Thanks @bone . Let me try to say this again. So let's say the ratios give you 2:1 for BOB, and 5:2 for NOB.

Then the natural weightings would be 1:1 for the BOB/NOB spread (butterfly).

But these weightings in the constructed fly actually imply a 5:1 notes to ultra bonds ratio.

The only thing that worries me is that the NOL spread (notes over ultra bonds) is actually 4:1.

It's a 5:2:1 fly but the NOL spread is 4:1, so I'm theoretically overweight notes?
More...
 
Last edited:
bone said:
...the correct 10's-30's-Ultra Butterfly leg quantity ratios would be: 5:4:1.
More...

Thanks bone. I'm starting to like rate fly's and ICS spreads.

Definitely useful whether you are trading them or just looking to get a read on the action in the outrights.

Cheers.
 
I'm so happy that you are treading down the path to enlightenment. :strong:

Real Money said:
Thanks bone. I'm starting to like rate fly's and ICS spreads.

Definitely useful whether you are trading them or just looking to get a read on the action in the outrights.

Cheers.
More...
 
You must log in or register to reply here.
Back
Top