Dude, you're looking at a single specific issue! Of course, a specific cash bond has nowhere near the liquidity of futures. Just think about it this way: current 10y bund (3.5% Jul 19) has a total issue size of EUR13bn; current open interest in Sep9 bund contract is arnd 850k, which gives you arnd 6.5 times more bonds. That's the whole point of futures, after all. The closing time is up to the dealer. Most of the ones I know close arnd 4:15PM GMT.
Got your point, but in case of US benchmarks Treasuries the spread is only 1/2 to 1 tick. What i want is to be able to follow yields of german benchmark bonds on 2- 5 & 10 yr maturity. My simple idea is that futuresbased spreads should reflect changes on cash bond yield spreads. Do you think basis risk can be as significant as to alter this relation?
Well, there's a whole lot more US cash bonds out there. For example, issue size for the current 10s is $64bn; open interest on Sep 10yr note contract is arnd 1MM; so the ratio is only arnd 1.5 (actually for my previous bund example the ratio is more like 8.5, 'cause I forgot Finanzagentur retained EUR2.5bn of the issue; so free float is only arnd EUR10bn). Also, the US mkt is structurally different (for historical reasons), so the liquidity differential between cash bonds and futures is very different in the US and EUR mkts (a lot more skewed to cash in US, futures in EUR). As to your other question, bid/offer on futures will never reflect the bid offer on the cash bonds. In order to arb it, you'd have to do basis trades and repos and they will have bid/offers of their own. Cash desks at banks sorta do this, but they have balance sheet and clients to screw.
Moreover, I just realized smth... Why are we comparing futures with current on-the-runs? The OTR bond might not even be in the basket, so it's completely apples and oranges.
Can you elaborate on the possible reasons for the above. My point was to compare US cash with german cash. If the Bid/ASk spread is as wide then one maybe losing 1-2 bps when doing curve tradeslike 2-10s in German cash. Also whats the average daily turnover in german bonds, for US i could find http://archives1-sifma.org/story.asp?id=1209 It seems its atleast 200-300 Billion dollars a day, what about german. there are some good artices here on US cash http://www.newyorkfed.org/research/capital_markets/index.html Can you give some good literature on german bonds trading. Regards Naveen
Here are some noob opinions on bond futures, cash & basis 1.Bond futures have a deliverable basket of cash bonds, CTD keeps on changing( How frequently i dont know) & this possibly gives rise to basis trade. 2. For 2, 5 yr futures basis risk should be low since deliverable bond maturity is very close to 2, 5 yrs. 3. Basis trading would make sure that futures follow cash closely. 4. When executing curve trades using futures( 9 out of 10 times) futures based spread follows cash yield spread. Above maybe nonsense , you can point that out. Lastly if someone has an edge in predicting yield spread behavior, should he trade in cash or futures , what will be pros & cons of each. I think futures will be better, more bang for buck+ more price points e.g cash 2 yr at 99 31 & Zt at 108 2, ZT will have more price range. I hope i am clear. Good Trading Naveen
This is probably the most exhaustive reference you will find, but it's sorta expensive, I guess, for a book: http://www.amazon.co.uk/European-Fi...=sr_1_1?ie=UTF8&s=books&qid=1249638282&sr=8-1 You might also like this paper from the ECB: http://www.ecb.int/pub/pdf/scpwps/ecbwp432.pdf A few (but not all) of EUR guvvies are traded over MTS, the biggest interdealer platform. If you google and hunt around, you should be able to figure out what the rough total volume is. My extremely back-of-the-envelope calc suggests that German cash volume should be arnd 1/4 of the US.
This is not exactly the liveliest conversation, Neveen, as it seems I'm the only one willing to offer an opinion. Do you want me to respond to this again or have you heard enough out of me?
Agreed that there is not much participation maybe because not many find common threads in their trading. You have given some very useful information to me, I am all ears here. I cant find this information from anyone here + any wrong notion about markets may one day ruin ones career. I am learning.
Current contract CTD changes are VERY rare in EUR and GBP, rare in USD. Some funky micro bond games have to be played for a CTD switch to occur (unless, which also happens rarely, there's lots of optionality in the basket). This year the only on-the-fly CTD change I have seen occurred in the Sep Gilt when 5 18s got massively squeezed (but, then again, I haven't focused a lot on US futures, where baskets are larger and I might have missed something). However, CTD switches don't produce the basis. Basis happens simply because the instrument is a future. No, basis really doesn't directly depend on the maturity of the bond. It's more a function of the repo mkt, if anything. Yes Very roughly, but it would all depend on the mkt. Basis is tradable and you can take a view on it. This means that futures and cash bonds CAN get out of whack. This is exactly what happened last fall, when balance sheet constraints (i.e. no appetite for cash bonds) caused all sorts of crazy shenanigans in the basis world. It depends. If you have a very strong view on the curve, you may be willing to tolerate the various residual risks that a futures position will inevitably expose you to. Normally these risks are well-contained, but if you were playing with futures last year, you might have gotten all sorts of unexpected (and, probably, unpleasant) pnl surprises. For cash bonds, things are more straightforward, as there's no CTD games, etc. However, the main idea is that there's no free lunch. Ultimately to get exposure to the bond curve, you, in one way or another, implicitly or explicitly, are going to face the repo mkt. You always have to be mindful of what your risks are there. I might add that what you really should do to get a good understanding of the basis is read the bible: http://www.amazon.com/Treasury-Bond...=sr_1_1?ie=UTF8&s=books&qid=1249655811&sr=8-1