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by Ashraf Laidi
Posted: Feb 22, 2010 5:00
Comments: 2338
Forum Topic:

USD

Discuss USD
 
macrosam
United States
Posts: 190
15 years ago
Apr 6, 2010 22:58
I think the issue in your analysis is the misplacement of the relationship between yield and price because you are observing the yield on one treasury and assuming that the futures price moves respective of that treasury when in fact the futures is referencing an entirely different treasury than the one whose yield you are observing. All that is included in the price of a future is the following:

(note that CTD = Cheapest-to-deliver treasury that will meet the delivery stipulations of the futures contract)

(CTD Price - CTD Carry - Option) / CTD Factor

The basis net of carry is the option value, or theoretical option value.

If the basis net of carry is cheap, then the futures are rich. If the basis net of carry is rich, then the futures are cheap. Any disparities will be quickly arbed out by the market and its participants.
catnip
Frankfurt, Germany
Posted Anonymously
15 years ago
Apr 6, 2010 22:42
macrosam
this is certainly correct. However if the 10 y future drops this could be reflecting an oversupply of UST
or the expectation thereof. This is I think equivalent to expectation of rising yield. If it were a commodity future it were backwardation. I am wrong ?
macrosam
United States
Posts: 190
15 years ago
Apr 6, 2010 21:53
You cannot compare the yield on the current 10yr treasury (the cash treasury, the 3.625% 2/20) to the 10 year futures contract. There is a difference between cash treasuries and treasury futures. Futures are short an option which is based on the cheapest-to-delivery treasury out of the available basket of deliverable treasuries. When you go long a future, you are short an option because the other party that is short the future to you has an option on which cash treasury to eventually deliver into your contract if you don't close out (this is how it is settled, similar to how barrells of oil will be delivered if you hold crude futures to settlement). The current cash treasury that the 10 year futures considers to be the cheapest-to-deliver is the 3% of 2/17, not the current 3.625% of 2/20 that you are making the price/yield comparison to. So you are comparing the yield on the 3.625% 2/20 to the futures contract that is referencing a different 10 year treasury (the 3% of 2/17) in that basket of available treasuries to be delivered.

Add to this additional distortions that can result due to the futures contract being too cheap or too rich to the cash treasury it is referencing as the cheapest-to-deliver (i.e. may be rich since requires less cash outlay than the cash treasury, etc.).
catnip
Frankfurt, Germany
Posted Anonymously
15 years ago
Apr 6, 2010 21:39
I'm short on UST 10y price with a so called 100:1 turbo put. And I notice something strange. Yield and price move in opposite direction. but: the 10 y yield has retreated from 4% to 3.95% the nevertheless price continues to drop. Indeed futuresource.quote.com shows 10 y note futures drop. This can mean despite of whatever dovish statements a fund rate hike is expected. Also somewhat strange JPY rises vs USD.
macrosam
United States
Posts: 190
15 years ago
Apr 6, 2010 20:42
Thought the minutes were clearly dovish, emphasized by "some members" stating that they saw greater risk is tightening too early than too late. The talk about mid-term inflation possibly being a risk seemed more like rhetoric thrown out there to placate hawks.
speculator
Posted Anonymously
15 years ago
Apr 6, 2010 20:36
i think the minutes today were USD neutral. ashraf is right about them trying to keep the lid on yields..but they are keeping market on their toes and this would certainly prevent USD selloff but more likely maintain the current uptrend unless market loses patience. but it seems that not many are expecting fed funds hike amytime soon well not before late spring/early summer so the dollar can stand on its legs of now and keep rising against non emergings
redstone
bristol, UK
Posted Anonymously
15 years ago
Apr 6, 2010 20:13
rate wasnt raised . when would be the next opportunity as usd is crashing against emerging markets currencies.( turkish lira)
ptaczek
Brno, Czech Republic
Posts: 110
15 years ago
Apr 6, 2010 13:43
Ashraf, excatly. Now it's no longer 'if' but 'when'. Let's see today's FOMC.
catnip
Frankfurt, Germany
Posted Anonymously
15 years ago
Apr 6, 2010 10:59
Tomorrow 10 y is going to be auctioned
Ashraf Laidi
London, UK
Posts: 0
15 years ago
Apr 6, 2010 10:42
And so the Fed does not raise the rate. Looks like central bank is worried that a rate hike would further propel bond yields to the roof. But they will have to raise it anyway.


Ashraf