Good Morning, I trade from 06:00 GMT to 19:00 GMt, so sorry for not being clear on session. I do track the yield spreads from BG Cantor data on CQG realtime, this is what i see just before todays CBOT open. Attached is how i track yields , i have lot of doubts on relationship between cash & bond futures. 1. Lets say i see that 2-5-10 butterfly is down 10bp in yield terms as per cash , but bond futures butterfly is trading at the same level, what can i infer? My naive thinking says i should be a seller in futures butterfly. I have more naive thoughts to follow Regards, Naveen PS: I am unable to attch can some body plz tell me how to
As I have mentioned before, you can infer very little, right off the bat. The main point is that the CTD for the N year future is not necessarily the N year bond. That's even before delving into the various basis discussions.
You are right that CTD fot ZN will be a bond with 7 or 8 yrs term, I havent done this but lets say i take butterfly in yield terms based on CTD bonds, & its down 10 bp, then what can one say if futures butterfly in price terms is at same level heres the attchment http://www.flickr.com/photos/40400575@N07/3716033271/
Well, the first question to ask is how do you define the fly level from futures? Specifically, what do you refer to as the 'futures implied yield'? In general, if you just think about what the difference between a future and a cash bond is you will, most likely, answer your own question.
I take the duration neutral ratio of bond futures in bloomberg for ZT & ZF portfolio,i dont remember but lets say its 100 ZT & 89 ZF, say same ratio for ZF ZN portfolio is 100ZF 70 ZN. Since adding two duration neutral portfolios will result in a duration neutral portfolio. (100 Long ZT + 89 Short ZF)- ( 100Long ZF+ 70 short ZN) will be duration neutral. ZT:ZF:ZN ratio will 100:189:70 I currently use ratio 3:5:2. So when buying 2-5-10 i buy 3 lots ZT, sell 5 lots ZF, buy 2 lots ZN. IS this approach OK in ur opinion? I dont understand any yield measure based on futures.
This makes sense, as this simply gives you a DV01-weighted fly. Then you probably do the same thing with cash bonds to construct a DV01-weighted cash bond fly. However, my question is about how you're planning to compare the levels of the two flies? Are you going to do it in yield terms? If so, how will you do the yield calculations for futures?
There are lot of things here that i dont know like 1. How does bloomberg calculate duration neutral ratios for Futures based butterfly, i presume it uses CTD bond but i really dont know? 2. I dont make fly for cash bond in price terms , i simply see the 2- 5 yield spread minus 5-10 yield spread, easier to understand. 3. I dont compare both flies based on yield or price terms, i can only construct fly based on futures in price terms & fly based on cash bonds in yield terms.I only compra etheir relative direction or magnitude of change . I really dont know any yield calculation for futures.
BBG actually does it wrong. They take the spot DV01 of the CTD using the price implied by the price of the future and the conv factor. What you really should be doing is calculating the fwd DV01, but it's, in most cases, close enough. This, basically, implies that you have no way to compare the two flies at all. You can't look at one in yield terms and at the other in price terms. In general, for an individual bond future and a given bond in the deliverable basket, there's a basis between the two instruments that varies depending on a bunch of factors (some are quantifiable, like repo, while some are not, like balance sheet availability). So by trading the two flies against each other, you're really simultaneously trading the CTD basis in three different contracts. That's too complicated a trade to do, in my view, given all of the above. If you want to understand all these issues, get your hands on Burghardt's 'Treasury Bond Basis'.
Thanks For the replies, i seem to be ill prepared for this issue will get back when things become more clearer to me. IF anyone wants to pitch in with their thoughts plz do. I think that futures butterfly is quite popular amongst prop house traders, How do they analyse if anyone has some experience trading futures butterfly plz throw some light. My knwledge abot basis is actually very limited. Regards Naveen