Size of TUT (Futures Spread) vs STPP/FLAT (ETFs) for 2/10 Yield Curve Trade

Discussion in 'Financial Futures' started by Cyrix, Jul 10, 2016.

  1. Cyrix


    I currently trading 2/10 steepener or flattener using two ETFs: STPP and FLAT.
    These ETFs are very illiquid, and I am thinking about switching to futures for the curve trades.

    My broker, Interactive Brokers, offers a ticker TUT to trade the 2/10 curve with a face value of $300,000 per contract.
    Now I need to find equivalent size of TUT to replace the STPP/FLAT ETFs that I am familiar with.

    I charted the past performance of TUT and found that it's only about 1/10 of the performance of STPP/FLAT for a same period.
    For example, in the past 3 months, STPP moved -7% but TUT only moved -0.7% on the charts.

    Does this mean that going long one TUT contract is about the same as going long $30,000 STPP?

  2. eurusdzn


    Maybe look at the performance of the 2's and 10s outrights since jun 1st.

    The 2's have advance close to a full point 22/32 for about $1375.
    At approx $40 per bp. (DV01) that should be about a 35 bp. drop in yield.

    The 10s have gained 4 points and 9/32 for about $4280.
    At about $80 per bp thats about 54 bp. decline.

    You need 2/1 ratio to achieve a balanced $80 per bp.
    So thats $400,000(ZT)/$100,000(ZN) notional

    For a flattener 2*1375-4280 for a net of $1530 (from the short ZN leg) and at $80 per bp that
    implies the 2/10 spread dropped approx 19 bp. since June .($1530/$80)

    These are rough numbers from looking at the price charts of ZN and ZT and
    using a reasonable $80 DV01 for ZN.

    I'm sure exchange spread traders go about this differently but i wouldn't know.
    I view the accurate calculation of DV01's as the realm of mystics and Wizzards.
    40 and 80 dollar DV01 should be viewed as suspect.
  3. I'm not familiar with TUT or the ETF's since I trade the futures independently (I can't find a definition of eithier). But I'm familiar with the strategy as it was part of the portfolio in my last job (we also did it in swaps and other countries).

    There are two issues; the size in 10 year units and the ratio to 2 years. So the thing would normally be defined as long one 10 year contract and short N contracts of 2 year, where the ratio is N:1. A 10 year futures contract is worth $122,168.

    The ratio depends whether you want to be vol neutral (=delta neutral), beta neutral or duration neutral.

    The vol of the 2 year contract is about $2,161 a year and the 10 year $5,697
    Don't forget each 2 year future is worth $2000 a point whilst the 10 year is $1000

    If you account for that the vol ratio is 5.2

    The duration ratio would be closer to 8.5 / 1.8 (approx figures) or 4.7

    The reason for the difference is since 2011 the vol of the 2 year has been much less than the 10 year (normally it's the other way round).

    I can't be bothered to work out the beta ratio but it would be slightly less than the vol ratio (by construction).

    Most of these predetermined things use a fixed ratio maybe 4:1 (or 2:1 once you've accounted for the difference in notional size). If the ratios are different from what you're used to you'll get quite different volatility.

    i960 likes this.
  4. bathrobe


    Interesting to use etf's to spread TUT. One thing to note, the last two times the TUT was trading where it is we had the 08 debacle and the tech bubble, the S&P hit all time highs today and the last three days. Size is buying up here. Something is off.
  5. Cyrix


    Thanks guys.
    I found that TUT's DV01 is about 1/10 of STPP/FLAT.
    So I will be using 10 times of the size of STPP/FLAT to replace the exposures.
  6. I would consider doing something a little further out on the curve.

    If you look at a DV01 hedged chart of TUT, it merely trades as an inverse of ZN. FOB or NOB would probably give you what the TUT used to trade. Perhaps even 5y vs ultra 10y though I would wait for ultra 10s to build up in open interest.
  7. Cyrix


    Not anymore. TUT and ZN have deviated since 2017.