Performance of Rolling ZB Futures vs Holding VUSTX/TLT

Discussion in 'Financial Futures' started by Cyrix, Sep 13, 2016.

  1. Cyrix


    I am backtesting a strategy which involves rolling the nearest month of ZB (long-term treasury bond futures).
    I can't find a total return index for ZB futures that goes back long enough, so I am thinking about using TLT or VUSTX as a proxy. The later starts from the 90s.

    Does anyone know how large the difference between the performance of VUSTX vs rolling the front month ZB is?

    If the difference is just as small as the difference between TLT and VUSTX then it's considered pretty small and it's good for my purpose.

  2. I am not familiar with the details of VUSTX. It appears that they can hold mtges, as well as treasuries, which can be a source of out/underperformance, however small. The main thing for you to do is just to check what the average duration of VUSTX is and see if it's not too different to ZB.

    One other alternative to consider would be to use the 30y constant maturity bond to calculate the total return. That should go back far enough and might be the most decent proxy.
  3. Don't forget the main difference between the future and cash products will be (~) LIBOR.

    Because: return on future = duration * change in interest rate + coupon - LIBOR

    return on ETF = duration * change in interest rate + coupon

    [I'm slightly simplifying some things related to rolldown and interest on margin here, but these are relatively small effects]

  4. With all due respect, I am pretty sure this is incorrect...
  5. Cyrix


    Is there a way to find out the average duration of ZB futures?
    The CTD changes every month and I don't know how to get an estimate.

  6. Well, the CTD doesn't have to change every 3 months, really. However, you do have a point. You just need to approximate.

    Going back to your original post, why are not able to do the futures total return? Surely, this should be the simplest thing to do, by far.
  7. Cyrix


    To calculate a total return index I would also need to find/estimate the durations of the CTDs, which I don't know where to get historically.
  8. Sorry, I don't really understand... Why do you need to know anything about the CTD?
    Deuteronomy_24_7 likes this.
  9. Cyrix


    I thought, to calculate the return of the futures for each period, we needed both yield and duration of the underlying bond, no?
  10. Why? Futures, regardless of the underlying, are simple instruments. I mean think of it in trivial economic terms: you buy one ZB futures contract today and you sell it a week later. What is your total return determined by?
    #10     Sep 14, 2016
    drm7 likes this.