Gents (and Ladies)... I am trying to structure a flattener trade in the Italian 2s/10s BTP futures. The Bloomberg Index would indicate that, in the paper, there's about 265bps between the two positions at the moment; Bloomberg also says that the ratio for the futures is 4 to 1 (short four 2's for each long 10). This is all fine - except - when the futures roll out from Dec12 to Mar13 the CTD two year future becomes a different security and this security has a much higher yield of 2.3%, 20bps over the current CTD . The 10yr CTD doesn't change and currently yields 4.75% ...... So if I try to put the flattener on in the Mar13 futures I'll actually be getting it on at far worse level, about 245bps rather than the current 265bps .... Is there any way I can avoid this? And, if not, can anybody hazard a guess as to why the next CTD Italian two year is yielding so much more? Many thanks for any help, Daniel.
It's just the way the deliverable baskets happen to be. In the long-end contract the two currently cheapest happen to yield about the same, and they remain in the basket. On the other hand, with the short-end contract the two cheapest will roll out and there is a yield gap with the new ctd. BTW, there is a 15-20bp difference in going to the 3rd ctd on the longer-end contract so if the basket changed in the same way the short-end basket did you would be looking at similar gap in yield.
Thanks for the reply. That makes sense. So, if I go into the paper market and I bought my 10Yr - yielding 4.75% - and shorted my 2Yr - costing me about 2.1%+; then I would obviously have some positive carry. Is the effect of this "carry" impossible to replicate in the futures market? It would seem to me that it is... Thanks again.
Futures prices take into account carry, so yes that is reflected (not as cleanly as in the cash market, but it is there nonetheless). Get yourself a copy of Treasury Bond Basis by Galen Burghardt for the industry standard explanation/calculation of this stuff.