Say I think 10y UK gilts yield too low compared with 10y UST but worried about movements in the 5y yields. My horizon is a few months. I could try replicating that trade with: - long 6 five-year t-notes - short 1 ten-year t-note - short 1 t-bond - long 3 long gilts - short some 10 contracts from the short sterling green pack I am interested to hear if this is doable in practice or should not attempted by those without access to cash bonds or swaps. I got about 75-90% correlation from those ratios of futures against changes in the UK and US 5y5y's with 10 years of data.
A butterfly futures spread will isolate the the futures price (yield) shifts from changes in the curvature of the term structure. You buy the butterfly on the 5 note a few months out and sell the butterfly for the UST. If you insist in your strategy, then you better hope to find higher and enduring correlations in another time frame. 90+
I would certainly keep an eye on Eonia versus the US repo rate... Personally, I steer my clients away from cross-continental intra market plays if that's your original intent. It wasn't clear to me from your OP if it was a choose one country proposition or a US vs UK bet you are proposing. The cointegration lags can be problematic in terms of cross-country yields and I like to see spread combinations with positive correlations > 93 %.
Btw Bone, What does AMP mean when they say they don't support spreads? I asked the rep if it was favorable margin offsets or Intra-exchange spreads or options. He never replied back.
Not sure. If they are an exchange member FCM they should be offering the exchange SPAN margin offsets in terms of margin rates for futures spreads and options just as the exchange publishes them daily. It's an exchange rule. Maybe their intraday risk system isn't set up to margin inter and intra market spreads intraday perhaps ? That's the big problem with these smaller futures brokers that deal almost exclusively with scalpers and simple flat price singular instrument directional traders. Any of the big, traditional Chicago FCMs will know how to margin a spread trade properly in terms of margin offset credits.
Please, whatever you decide, DO NOT TRADE MEAN REVERSION for cross-country spread trades. It is a pure divergence play and you will get crushed. I'm talking ZN/Bund, Eurodollar/Euribor, WTI / Brent, whatever.