Treasury Bond Basis Presentation

Workshop schedule
• Part 1: 4:00 to 5:30 (16:00 to 17:30)

– Brief history of bond futures
– Why use futures?
– Challenges to valuation
– Financial algebra of bond futures
– Trading
• Part 2: 6:00 to 7:30 (18:00 to 19:30)
– Hedging
– Cash/futures spreads and yield enhancement
– Special topics
28 November 11 Introduction to the uses of bond 2

futures/Burghardt
Brief history of bond futures
• Introduced in late 1970s in Chicago (first
GNMAs, then US Treasurys)
• Introduced in the 1980s in the UK and
Europe
• Expanded to different maturities
• Transformation of related markets
• Breadth of coverage today (14 countries,
not counting Russia)
futures/Burghardt
How to use bond futures
• In principle, there is nothing you can do in
the cash market that you cannot do in the
futures market (and the other way round)
• As a result, you can
– Speculate
– Hedge
– Arbitrage

futures/Burghardt
So why use futures?
• Usually cheaper to trade than related cash
instruments, often more liquid than related
cash markets
• Accessibility, anonymity
• Provide efficient access to forward
markets (repo link between cash and
futures
• Very low credit risk
futures/Burghardt
So why use futures?
• Futures allow you to separate the price
from the product
• Transparency, liquidity, competitively
accurate prices

futures/Burghardt
So why not use futures?
• Regulatory and legal hurdles
• Cash management practices
• Inflexible quantities and forward dates

futures/Burghardt
A high level of sophistication
• Trading futures is like playing a guitar (or
balalaika)
• To play the guitar well, you need to
understand music better than do other
instrumentalists
• To use futures well, you need to
understand financial markets better than
do other financial market specialists

futures/Burghardt
The value of a workshop like this
• Cannot prevent you from making mistakes
• Can allow you to recognize your mistakes
sooner
• Can allow you to learn from your mistakes
faster

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The starting point
• Futures contract specifications and
mechanics
• The basic financial algebra of futures
• Challenges to correct valuation

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Key contract specifications
• Notional value of 10,000 Rubles
• Short must deliver 10 (1,000 Ruble) bonds
from the deliverable basket
• Invoice price is determined by the bond’s
conversion factor
• Deliverable basket is determined when the
contract is listed for delivery

futures/Burghardt
Contract Specifications – OFZ2
Contract Symbol OFZ2-12.11
Contract Trading Symbol O2Z1
Contract Description Delivery futures contract on 2-year Russian Federation government bonds
Type Futures
Settlement Deliverable
Contract size 10
First Trading Day 24.08.2011
Last Trading Day 02.12.2011
Delivery 05.12.2011
Settlement procedure Delivery of bonds by the conclusion of the direct trade on MICEX Government-Backed Securities Section
Price tick 1
Cost of price tick 1
Lower limit 9,741
Upper limit 10,039
Settlement price of last clearing 9,890

session
Initial Margin (IM, rub) 298
IM value on 22.11.2011
Baskets of underlying bonds
issues and conversion ratios
• Futures contract on 2-year Russian Federation government bonds
Short contract code (settlement date): O2U1 – 05.09.2011
Bond Maturity date Coupon rate Conversion ratio

OFZ 25072 23.01.2013 7.15% 0.9848
OFZ 25078 06.02.2013 6.7% 0.9785
OFZ 25076 13.03.2014 7.10% 0.9726
For the purpose of calculating the conversion ratio the yield is 8.5%.
Short contract code (settlement date): O2Z1 – 05.12.2011

OFZ 25072 23.01.2013 7.15% 1.0028
OFZ 25078 06.02.2013 6.70% 0.9979
OFZ 25076 13.03.2014 7.10% 1.0044

OFZ 25075 15.07.2015 6.88% 0.9529
OFZ 25077 20.01.2016 7.35% 0.9647
OFZ 26203 03.08.2016 6.90% 0.9433
For the purpose of calculating the conversion ratio, the bond yield is 8.5%.

OFZ 25079 03.06.2015 7.00% 0.9549
OFZ 25075 15.07.2015 6.88% 0.9499
OFZ 25077 20.01.2016 7.35% 0.9599
OFZ 26203 03.08.2016 6.90% 0.9386
For the purpose of calculating the conversion ratio, the bond yield is 8.7%.
Variation margin and offsets
• Gains and losses on open positions are
settled in cash daily
• You need not carry open positions to
delivery – instead, you can offset long
positions by selling futures, or you can
offset short positions by buying futures

futures/Burghardt
Conversion factors
• The role of the conversion factor is to
convert the futures price into an invoice
price
• The conversion factor is the hypothetical
price at which the bond would produce a
yield chosen by the exchange
• The conversion factor is unique both to the
bond and to the contract month

futures/Burghardt

OFZ 25072 23.01.2013 7.15% 0.9848
OFZ 25078 06.02.2013 6.7% 0.9785
OFZ 25076 13.03.2014 7.10% 0.9726

OFZ 25072 23.01.2013 7.15% 1.0028
OFZ 25078 06.02.2013 6.70% 0.9979
OFZ 25076 13.03.2014 7.10% 1.0044
Invoice prices
• In a cash market trade,
Full (dirty) price = Net (clean) price + accrued
interest
• In a futures market delivery,
Futures invoice price = Futures price x
conversion factor + accrued interest
• The converted futures price takes the
place of the net or clean market price

futures/Burghardt
Futures are not forwards
• You buy and sell forwards, but go long and
short futures (even so, we talk about
buying and selling futures contracts)
• The short decides which bond to deliver
• Futures prices in general are lower than
forward prices because of the short’s
delivery options
• Consider the deliverable basket
futures/Burghardt
futures/Burghardt
Create a riskless asset
Creating a synthetic money market instrument
Today Futures delivery
Buy the bond Sell the bond here

here at its market at today's futures
price plus today's price times the
accrued interest bond's conversion
and sell futures at factor plus
today's market accrued interest
futures price at futures delivery

futures/Burghardt
Which bond is cheapest to
deliver?
• Before expiration, the cheapest to deliver
bond from the short’s perspective is the
bond with the highest implied repo rate*
(I’ve used a US money
market day-count
convention)
• At expiration, the bond with the lowest

converted spot price is cheapest to deliver
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March 2012 4-year bond basket

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Spot/futures price spread
• The spread between a bond’s spot price
and its converted futures price is generally
known as “the basis”
• This spread matters because its behavior
affects the performance of everything you
do with futures – speculating, hedging, or
arbitraging
• You need someone who knows how to
value the spread correctly
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Spot/futures price relationship
for the cheapest to deliver

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Challenges to correct valuation
• Access to market data
– Bond prices
– Term repo rates – including repo specials –
for both buying and selling
• A complete understanding of the rules that
govern delivery and invoicing (including
the delivery schedule)

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Repo rates

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Yield levels and the ctd
At expiry, the
futures price is the
lowest converted
spot price. This
chart assumes the
hypothetical yield
for calculating
conversion factors
is 6%.

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Yield spreads and the ctd

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Futures price before expiry

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Shifts in the cheapest bond

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March 2012 4-year bond basket

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The value of the shift option:
synthetic calls and puts
4-year bond prices as of March 2012 contract expiration Assign some
Series 25079 25075 25077 26203
probabilities to
Name
RFBL 7 RFBL 6.88 RFBL 7.35 RFBL 6.9 these shifts
06/03/15 07/15/15 01/20/16 08/03/16
Factor 0.9523 0.9475 0.9559 0.9347
Yield 7.95 7.83 8.12 8.21
Futures
CTD
Shift Converted prices at delivery price at Basis net of carry at delivery/factor Shift
series
delivery
-120 106.0834 106.6499 106.5225 107.0144 25079 106.0834 0.0000 0.5665 0.4391 0.9310 -120
-100 105.4966 106.0398 105.8378 106.2416 25079 105.4966 0.0000 0.5433 0.3412 0.7450 -100
-80 104.9143 105.4347 105.1591 105.4763 25079 104.9143 0.0000 0.5204 0.2448 0.5620 -80
-60 104.3364 104.8342 104.4863 104.7183 25079 104.3364 0.0000 0.4978 0.1499 0.3819 -60
-40 103.7630 104.2385 103.8194 103.9676 25079 103.7630 0.0000 0.4756 0.0564 0.2047 -40
-20 103.1939 103.6475 103.1582 103.2241 25077 103.1582 0.0357 0.4893 0.0000 0.0659 -20
0 102.6292 103.0611 102.5028 102.4878 26203 102.4878 0.1414 0.5733 0.0151 0.0000 0
20 102.0688 102.4793 101.8531 101.7584 26203 101.7584 0.3104 0.7209 0.0947 0.0000 20
40 101.5127 101.9020 101.2090 101.0361 26203 101.0361 0.4766 0.8660 0.1729 0.0000 40
60 100.9607 101.3293 100.5704 100.3205 26203 100.3205 0.6402 1.0087 0.2498 0.0000 60
80 100.4130 100.7610 99.9373 99.6118 26203 99.6118 0.8012 1.1491 0.3255 0.0000 80
100 99.8694 100.1971 99.3097 98.9098 26203 98.9098 0.9595 1.2872 0.3998 0.0000 100
120 99.3298 99.6375 98.6874 98.2145 26203 98.2145 1.1154 1.4231 0.4729 0.0000 120

futures/Burghardt
Synthetic options
• In this example, a long position in the
March 12 basis of issue 25079 would be
like a put option on bonds – rising in value
as yield rise and bond prices fall
• A long position in the basis of issue 26203
would be like a call
• A long position in the basis of issue 25077
would be like a straddle

futures/Burghardt
Scenario analysis and the value
of the short’s delivery option
• How are yield (changes) distributed?
• How volatile are yields?
• How variable is the slope of the curve?
• Typically, a shift and twist analysis with a
reasonable number of scenarios will do a
good job of handling the variables that
matter

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Are futures rich or cheap?

futures/Burghardt
Looking for cash/futures trades
Looking for
cash/futures
trades
Implied repo rates Actual Spread

Trade date 2-year 4-year O/N 2-year 4-year An implied repo rate
11/18/2011 0:00 5.74% 3.22% 5.49% 0.25% -2.27%
11/17/2011 0:00 4.85% 7.91% 5.42% -0.57% 2.49% higher than the actual
11/16/2011 0:00
11/15/2011 0:00
6.05%
6.77%
8.66%
5.95%
5.60%
5.65%
0.45%
1.12%
3.06%
0.30%
repo rate suggests a
11/14/2011 0:00 6.35% 8.93% 5.57% 0.78% 3.36% cheap cash/futures
11/11/2011 0:00 5.41% 5.99% 5.38% 0.03% 0.61%
11/10/2011 0:00 4.52% 6.23% 5.28% -0.76% 0.95% spread.
11/9/2011 0:00 4.99% 5.55% 5.36% -0.37% 0.19%
11/8/2011 0:00 4.37% 5.45% 5.33% -0.96% 0.12%
11/7/2011 0:00
11/3/2011 0:00
3.33%
4.10%
5.37%
4.05%
5.44%
5.37%
-2.11%
-1.27%
-0.07%
-1.32%
Cautions:
11/2/2011 0:00 4.21% 5.57% 5.56% -1.35% 0.01% Risk in O/N repo.
11/1/2011 0:00 5.09% 3.56% 5.77% -0.68% -2.21%
10/31/2011 0:00 6.14% 7.52% 5.74% 0.40% 1.78% Implied repo rates
10/28/2011 0:00 6.95% 11.23% 5.61% 1.34% 5.62%
10/27/2011 0:00 7.28% 9.10% 5.75% 1.53% 3.35% become increasingly
10/26/2011 0:00
10/25/2011 0:00
5.69%
6.97%
6.84%
6.22%
5.84%
5.71%
-0.15%
1.26%
1.00%
0.51%
sensitive to small
10/24/2011 0:00 7.02% 6.43% 5.60% 1.42% 0.83% price difference as
10/21/2011 0:00 5.56% 4.89% 5.57% -0.01% -0.68%
10/20/2011 0:00 5.65% 4.32% 5.54% 0.11% -1.22% you approach
10/19/2011 0:00 6.35% 5.06% 5.49% 0.86% -0.43%
10/18/2011 0:00 5.89% 6.61% 5.52% 0.37% 1.09% contract expiration.

futures/Burghardt
Synthetic bonds
• A synthetic government bond can be
created by combining
– Duration (or PV01) equivalent futures position
– Term money market instrument with a
maturity equal to the futures contract’s
expiration date
• Possible opportunities for 1-way arbitrage
by bank funding desks

futures/Burghardt
Futures risk and return algebra
• Futures + cash = real bond
• Futures = real bond – cash (i.e., a fully
leveraged or geared position in the bond)
• Real bond – futures = cash
• Futures profit/loss is the result of futures
price change only
• Bond profit/loss is the result of bond price
change, accrued coupon income, and
actual or implied financing cost
futures/Burghardt
Synthetic and real bonds
• The payoff on a synthetic bond is the sum
of
– Changes in the value of the futures position
– Interest income on the term money market
instrument
• The payoff on a real bond is the sum of
– Changes in the value of the bond
– Coupon income on the bond

futures/Burghardt
Synthetic and real bonds (2)
• If futures are fairly priced, the total return
to the real bond will equal the total return
to the synthetic bond except for the cost of
and payoff to any embedded delivery
options

futures/Burghardt
Uses of futures
• The RTS’ excellent summary of strategies
includes uses that fall into three categories
– Directional/speculative (outright buys and
sells and spreads)
– Hedging (actual and anticipatory, duration
management)
– Arbitrage (cash/futures spreads, yield
enhancement)

futures/Burghardt
Directional strategies
• Buy futures in lieu of buying cash bonds to
bet on a fall in interest rates
• Sell futures in lieu of shorting cash bonds
to bet on a rise in interest rates
• Buy futures on one part of the curve (e.g.,
2 years) and sell futures on another part of
the curve (e.g., 4 years) to bet on a
steepening of the yield curve

futures/Burghardt
2-year and 4-year zero coupon
yields
Comments on outrights
• Futures provide efficient access to the
government bond market
• Relative richness or cheapness of the
contracts may be relatively unimportant
• Comparing a futures trader’s gains and
losses with those of a cash bond trader’s
requires you to keep track of coupon
income and financing costs

futures/Burghardt
Comments on spreads
• You are trading the forward yield spread,
not the spot yield spread
• Important to use the right contract ratios to
isolate a trade on the slope (or shape) of
the curve from a trade on the level of the
curve (see next slide)
• Tricky to compare gain or loss on futures
trade with gain or loss on equivalent
spread trade done in the cash market
futures/Burghardt
Constructing a yield curve trade
Ruble values of a basis point
(December 2011 contracts
Date 2-year 4-year
11/18/2011 -2.01 -3.85 To bet on a steepening of the yield
11/17/2011 -2.01 -3.85 curve, you would buy 2-year contracts
11/16/2011 -2.02 -3.46
11/15/2011 -2.02 -3.47
and sell 4-year contracts
11/14/2011 -2.03 -3.88
11/11/2011 -2.04 -3.88 If you use a ratio of 1:1, your net rv01
11/10/2011 -2.04 -3.48
11/9/2011 -2.04 -3.50
would be 1.84 rubles using the values
11/8/2011 -2.04 -3.51 for 11/18/11.
11/7/2011 -2.04 -3.50
11/3/2011 -2.05 -3.51
11/2/2011 -2.05 -3.51
To be rv01 or duration neutral, you
11/1/2011 -2.05 -3.50 would buy 1.92 2-year contracts for
each 2-year contract you sell
The notional or face value of a single
contract is 10,000 rubles
Each contract calls for the delivery
of 10 bonds, each with a face value
of 1,000 rubles

futures/Burghardt
Workshop: Part 2
• Hedging
• Cash/futures spreads
• Special topics

futures/Burghardt
Hedging strategies
• Hedge a position against a rise in interest
rates (great for dealers)
• Manage a portfolio’s duration
• Manage a portfolio’s exposure to a change
in the slope of the curve
• Asset allocation
• Anticipatory hedges
– Expected bond issuance
– Expected
28 November 11 cash inflow
Introduction to theto
usesbe invested
of bond 49
futures/Burghardt
Comments on hedging
• Why hedge? Why not sell the actual
bond?
• If you do hedge, you can
– Sell the bond forward
– Sell a different bond in the spot market
– Sell a different bond forward
– Sell a bond futures contract

futures/Burghardt
Hedges turn bonds into term
money market instruments
Convergence of the spot and
futures prices reduces the
bond’s yield to a money
market yield and may cost
you the price of the delivery
options

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Hedges never work perfectly
• The only perfect hedge is to sell the
position
• All other hedges produce unexpected
gains and losses
– Repo
– Changes in yield spreads
– Changes in cheapest to deliver bond
– Changes in the value of short’s delivery
options
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Competing Hedge Ratios

futures/Burghardt
Hedge a spot position
• Excellent for dealers who want to
underwrite a large cash position while in
the process of sales and distribution
• Experience shows the cash markets are
always more liquid when futures markets
are open than when they are closed (or
only lightly traded)

futures/Burghardt
Manage a portfolio’s duration
• One great advantage of futures is that you
can control exposure to a change in the
general level of interest rates without
undoing a well constructed portfolio
• Another is that you can extend the
duration of the portfolio beyond what is
available in conventional bond markets

futures/Burghardt
Manage exposure to the curve
• In many cases, an investor cares about his
exposure to a change in the slope of the
yield curve
• The availability of bond futures at three
points on the Russian government bond
yield curve makes it possible to take a
more nuanced approach to controlling
interest rate risk

futures/Burghardt
2-year and 4-year zero coupon
yields
Asset allocation
• An extension of the duration management
argument is that one can use futures to
change the exposure of an entire portfolio
to stocks and bonds (and to commodities
and, possibly, foreign currencies) without
touching the actual portfolio
• Futures overlay programs also allow you
to create portable alpha products

futures/Burghardt
Anticipatory: Expected issue
• The sale of futures can provide protection
against a rise in interest rates between
now and when you plan to do a bond
offering
• Comment: the futures sale will protect you
against a change in the government bond
rate but not against a widening of your
spread against government bond yields

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Anticipatory: Expected cash
inflow
• The flip side of the expected issue
problem is the expected investment
problem – that is, an inflow of cash that
you intend to invest at a fixed rate

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Cash/futures spreads
• Creating synthetic term cash
• Buying or selling mispriced cash/futures
spreads
• Using synthetic bonds to enhance portfolio
yields

futures/Burghardt
Synthetic term cash
• Buying bonds and selling bond futures
creates a synthetic short-term bond with a
maturity coinciding with the futures’
settlement date
• Similar to a reverse repo trade where cash
is lent against a pledge of securities
• Reverse the trade to borrow synthetically

futures/Burghardt
Looking for cash/futures trades
Looking for
cash/futures
trades
Implied repo rates Actual Spread

Trade date 2-year 4-year O/N 2-year 4-year An implied repo rate
11/18/2011 0:00 5.74% 3.22% 5.49% 0.25% -2.27%
11/17/2011 0:00 4.85% 7.91% 5.42% -0.57% 2.49% higher than the actual
11/16/2011 0:00
11/15/2011 0:00
6.05%
6.77%
8.66%
5.95%
5.60%
5.65%
0.45%
1.12%
3.06%
0.30%
repo rate suggests a
11/14/2011 0:00 6.35% 8.93% 5.57% 0.78% 3.36% cheap cash/futures
11/11/2011 0:00 5.41% 5.99% 5.38% 0.03% 0.61%
11/10/2011 0:00 4.52% 6.23% 5.28% -0.76% 0.95% spread.
11/9/2011 0:00 4.99% 5.55% 5.36% -0.37% 0.19%
11/8/2011 0:00 4.37% 5.45% 5.33% -0.96% 0.12%
11/7/2011 0:00
11/3/2011 0:00
3.33%
4.10%
5.37%
4.05%
5.44%
5.37%
-2.11%
-1.27%
-0.07%
-1.32%
Cautions:
11/2/2011 0:00 4.21% 5.57% 5.56% -1.35% 0.01% Risk in O/N repo.
11/1/2011 0:00 5.09% 3.56% 5.77% -0.68% -2.21%
10/31/2011 0:00 6.14% 7.52% 5.74% 0.40% 1.78% Implied repo rates
10/28/2011 0:00 6.95% 11.23% 5.61% 1.34% 5.62%
10/27/2011 0:00 7.28% 9.10% 5.75% 1.53% 3.35% become increasingly
10/26/2011 0:00
10/25/2011 0:00
5.69%
6.97%
6.84%
6.22%
5.84%
5.71%
-0.15%
1.26%
1.00%
0.51%
sensitive to small
10/24/2011 0:00 7.02% 6.43% 5.60% 1.42% 0.83% price difference as
10/21/2011 0:00 5.56% 4.89% 5.57% -0.01% -0.68%
10/20/2011 0:00 5.65% 4.32% 5.54% 0.11% -1.22% you approach
10/19/2011 0:00 6.35% 5.06% 5.49% 0.86% -0.43%
10/18/2011 0:00 5.89% 6.61% 5.52% 0.37% 1.09% contract expiration.

futures/Burghardt
Strategy: Buy or sell cash/futures
spread
• Cash and Carry (if futures are rich)
– Purchase bonds and sell futures
– If income exceeds the funding cost (or, if
losses from convergence are less than your
positive carry), an arbitrage profit is realized
• Sell the spread (if futures are cheap)
– Sell bonds and buy futures
– If gains from convergence exceed your
negative carry, an arbitrage profit is realized
futures/Burghardt
Trades when futures are cheap
• Sell bonds/buy futures (i.e., sell the basis)
• Replace expensive bonds with synthetic
bonds (yield enhancement)
• Treasury bond futures cheap in late 1980s
• Treasury note futures and Bund futures
cheap in early 1990s
• Treasury note futures cheap in early
2000s
futures/Burghardt
Government Securities Positions in
Bonds and Bond Futures

futures/Burghardt
Selling the cash/futures spread
• Sell the bond short (overnight or term
repo)
• Buy an appropriate number of futures
• Experience selling the 10-year Treasury
note basis during the early 2000s
• The problem with selling the bond basis in
the spring of 1986 (and other squeezes)

futures/Burghardt
Example of selling the basis

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Selling the 10-year basis, 2000

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Selling the 10-year basis: 2001

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Selling the 10-year basis: 2002

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Yield enhancement (1)

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Yield enhancement (2)

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Additional topics
• Power of forward pricing
• Squeezes
• Importance of financing
• Absence of a term repo market
• Managing the rolls
• Fails

futures/Burghardt
The power of forward pricing
• Forward yield curves are better behaved
than spot yield curves
• Forward prices are breakeven prices
• Forward price relationships reveal
opportunities that are not apparent in the
spot market (when a friend bought the
forward TED for 0 basis points)

futures/Burghardt
Spot and forward curves

futures/Burghardt
Buying the forward ted for free
• To buy the “ted” spread, you buy
Treasuries and sell Eurodollar futures
• You can trade the spread forward by using
term repo to buy the Treasuries
• How could the spread have been free?

futures/Burghardt
Squeezes
• Short squeezes are the most common
• Long squeezes are possible

futures/Burghardt
Financing is half the battle
• Easily half the difference between a spot
trade and an equivalent futures trade can
be explained by financing
• Have someone on the team who knows
repo markets inside and out
• Know where the collateral is
• The repo desk will be the last profitable
desk in the financial world
futures/Burghardt
Absence of a term repo market
• Absence of a term repo market makes it
difficult to value futures properly
• On the other hand, one might create a
synthetic term money market instrument
(buy bond/sell futures), finance it in the
overnight market with an eye to profiting
from the spread between the implied term
rate and the sequence of overnight rates

futures/Burghardt
Managing the rolls
• Anyone who maintains long or short
futures positions for extended periods of
time will need to deal with contract rolls –
that is, the replacement of an expiring
position in one contract month with an
open position in the next contract month
• Managing these rolls correctly can,
depending on how the market treats them,
either save you or make you a great deal
futures/Burghardt
Fails
• Fails in the futures market are penalized
heavily while fails in the spot market can
be normal practice
• It is extremely important to know the rules
governing deliveries in the futures market
if you intend to take positions to delivery

futures/Burghardt
Special topics in short-term
rates
• Riding the yield curve
• Stub risk

futures/Burghardt
Insights into cash and carry
• Money market futures (e.g., Eurodollar
futures) allow one to disaggregate the
deposit curve to understand how standard
banking trades makes money
• The following slide shows the payoff to
borrowing short and lending long
• This payoff, in turn, would be a cost of
maintaining a short position

futures/Burghardt
Riding the yield curve

futures/Burghardt
Stub risk
• Stub risk is the risk associated with term
financing from today until contract
expiration
• Changes in repo rates are largely
unrelated to changes in bond yields
• Useful to know when deciding how to
construct your hedge

futures/Burghardt
Sources of interest rate risk

futures/Burghardt
Level and changes, 5-years

futures/Burghardt
Eras of the US Treasury bond
basis
• Cash and carry (1977-78)
• Negative yield curve (1979-81)
• Positive yield curve (1982-84)
• Golden age of yield enhancement (1985-
89)
• Volatility arbitrage (1990-91)

futures/Burghardt
Eras of the US Treasury bond
basis
• Death of gamma (1991-93)
• Callables’ last hurrah (1993-94)
• The long dry spell of the 11-1/4s (1995-99)
• 6% factors and the rebirth of bond basis
trading (2000 - ?)

futures/Burghardt
More eras?
• The ultra bond contract
• A new dry spell?

futures/Burghardt
Conclusion
• For more information, see Burghardt,
Belton, Lane, and Papa, The Treasury
Bond Basis, 3rd edition (McGraw-Hill)
• Questions?

futures/Burghardt
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Workshop schedule

• Part 1: 4:00 to 5:30 (16:00 to 17:30)

28 November 11 Introduction to the uses of bond 2

28 November 11 Introduction to the uses of bond 4

28 November 11 Introduction to the uses of bond 6

28 November 11 Introduction to the uses of bond 7

28 November 11 Introduction to the uses of bond 8

28 November 11 Introduction to the uses of bond 9

28 November 11 Introduction to the uses of bond 10

28 November 11 Introduction to the uses of bond 11

Contract Trading Symbol O2Z1

First Trading Day 24.08.2011

Last Trading Day 02.12.2011

Cost of price tick 1

Lower limit 9,741

Upper limit 10,039

Settlement price of last clearing 9,890

Bond Maturity date Coupon rate Conversion ratio

Short contract code (settlement date): O2Z1 – 05.12.2011

Bond Maturity date Coupon rate Conversion ratio

Bond Maturity date Coupon rate Conversion ratio

Short contract code (settlement date): O4Z1 – 05.12.2011

Bond Maturity date Coupon rate Conversion ratio

28 November 11 Introduction to the uses of bond 15

28 November 11 Introduction to the uses of bond 16

Bond Maturity date Coupon rate Conversion ratio

Short contract code (settlement date): O2Z1 – 05.12.2011

Bond Maturity date Coupon rate Conversion ratio

28 November 11 Introduction to the uses of bond 18

Today Futures delivery

Buy the bond Sell the bond here

28 November 11 Introduction to the uses of bond 21

• At expiration, the bond with the lowest

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Implied repo rates Actual Spread

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