US Treasury Futures/German Bond Futures

[TheNegotiator 13]

Hi everyone,

 

I'd like to start a thread to discuss contracts such as ZN, ZB, FGBL, FGBM, FGBS etc, etc.

 

I feel that they are under represented and have great potential for guys at TL. Obviously they have different drivers to the stock indices but actually with rates looking like they will start to change worldwide, this could a chance for government bond futures to shine.

[TheNegotiator 13]

To begin with, the German Bund is the benchmark in Europe and US Treasury Notes are the benchmark pretty much worldwide for government debt. The futures on these contracts are therefore very liquid as they are traded and held for a multitude of different reasons.

 

For simplicity's sake, I'll just outline the basic structure of each product set. There are many more contracts involved in these systems, but right now I'll just tell you about the main ones which you may be interested in to trade.

 

So for the US, please bear in mind that I have little experience in spreading in the US so if I miss something here please point it out, you have 2's, 5's, 10's, 30's. As the futures are based on a basket of maturities, there is a range for each of the mentioned duration of maturities. The futures for these are in order ZT, ZF, ZN, ZB. For the German Bonds, you have the same 2's, 5's,10's, 30's but they are called Schatz, Bobl, Bund, Buxl.

 

As far as trading goes, there are outright position traders in individual contracts and very importantly, there are spread traders who look to profit from changes in the yield curve. This yield curve is based on the rate of return you are likely to get on your money depending on the length of time you hold it for. Generally, a 'normal' yield curve, is one which curve up in yield as time to maturity increases. This is because it's more certain what is likely to happen in the short term than it is in the long term and so less risky and so you expect a lower return on investment.

 

Many different things can effect the nature of a yield curve. The main ones are interest rates, inflation, global risk events, central bank programmes. The general premise though is that when there are interest rate changes, this effects the short end of the curve more as longer maturities could see the interest rate fluctuate back and forth. Inflation generally effects the longer end more as over a longer period of time, the value of your money will change more. Inflation is bad for bond values as money is worth less so value has to go down to get the same real return on investment. Interest rate hikes are bad for bond values as this means new issues of the same bonds have higher rates attached to them, so to counter this the current lower interest rate bond is discounted so it will return the same amount on the investment. The inverse is generally true for both, although other factors will be at play too. When economic figures come out, often you have the case, more so when the economy is doing well for a longer period of time, that good figures send prices down. This could be in expectation of higher chance of interest rate hikes down the line. Protracted bad period could lend themselves to when poor numbers are released, bond prices go up with the view being one of a loose monetary policy environment likely to continue.

 

The other main factor is the flight to safety/quality principle. When specific thing happen like disgruntled people targeting the west(or anywhere else) or massive natural catastrophes happen, stocks can be adversely affected and amidst uncertainty they usually are. But people need to put there money somewhere and it's usually the likes of bonds, gold and the dollar. So events such as these will send the bonds rocketing up.

 

As far as the spreads go, you basically sell one contract and buy the other in a particular ratio or vice-versa. Also common is the fly spread which is say buy one spread so e.g. long 2 yr- short 5yr and then short the next down the line in the curve so short 5yr- long 10yr. So you end up long 2yr-short 5yr-long 10yr in the specified ratio.

 

All of this should mean you are less exposed to risk as these contracts are very much linked. With that, spread traders usually do bigger size and more round trips. Brokers normally will give them favourable margin and round turn rates because of this.

 

Anyway, that's a quick(and I do mean quick) overview of these products and spreading them. I'm not saying that you have to spread them, but I think you need to be aware of the spreads and what they are doing if you want to trade them. I do think that especially the US Treasuries are pretty technical and useful to monitor with market profile, but I don't think you absolutely have to use mp either. I'll have a look to see if I can get the current spread ratios between all these products and post some charts of the spreads at some point. If anyone has the current ratios and wants to chip in, that'd be useful too.

[TheNegotiator 13]

Schatz:Bobl:Bund (intentionally skipped Buxl as I didn't find the data yet!)

 

15:6:4

 

Schatz:Bobl spread is charted 2.5:1

 

Bobl:Bund spread is charted 1.5:1

 

Please if you have the correct values for the US, post them. But to get an idea, it looks like they are something like:-

 

2yr:5yr:10yr:30yr

 

30:15:6:2

 

2yr:5yr charted 2:1

 

5yr:10yr charted 5:3

 

10yr:30yr charted 3:2

 

I actually don't believe these are accurate so please take with a pinch of salt. The Schatz:Bobl:Bund I believe is far more reliable though.

Edited August 11, 2011 by TheNegotiator

[kuokam 10]

I thought the benchmark was the 30 years bond?

 

To begin with, the German Bund is the benchmark in Europe and US Treasury Notes are the benchmark pretty much worldwide for government debt. The futures on these contracts are therefore very liquid as they are traded and held for a multitude of different reasons.

 

For simplicity's sake, I'll just outline the basic structure of each product set. There are many more contracts involved in these systems, but right now I'll just tell you about the main ones which you may be interested in to trade.

 

So for the US, please bear in mind that I have little experience in spreading in the US so if I miss something here please point it out, you have 2's, 5's, 10's, 30's. As the futures are based on a basket of maturities, there is a range for each of the mentioned duration of maturities. The futures for these are in order ZT, ZF, ZN, ZB. For the German Bonds, you have the same 2's, 5's,10's, 30's but they are called Schatz, Bobl, Bund, Buxl.

 

As far as trading goes, there are outright position traders in individual contracts and very importantly, there are spread traders who look to profit from changes in the yield curve. This yield curve is based on the rate of return you are likely to get on your money depending on the length of time you hold it for. Generally, a 'normal' yield curve, is one which curve up in yield as time to maturity increases. This is because it's more certain what is likely to happen in the short term than it is in the long term and so less risky and so you expect a lower return on investment.

 

Many different things can effect the nature of a yield curve. The main ones are interest rates, inflation, global risk events, central bank programmes. The general premise though is that when there are interest rate changes, this effects the short end of the curve more as longer maturities could see the interest rate fluctuate back and forth. Inflation generally effects the longer end more as over a longer period of time, the value of your money will change more. Inflation is bad for bond values as money is worth less so value has to go down to get the same real return on investment. Interest rate hikes are bad for bond values as this means new issues of the same bonds have higher rates attached to them, so to counter this the current lower interest rate bond is discounted so it will return the same amount on the investment. The inverse is generally true for both, although other factors will be at play too. When economic figures come out, often you have the case, more so when the economy is doing well for a longer period of time, that good figures send prices down. This could be in expectation of higher chance of interest rate hikes down the line. Protracted bad period could lend themselves to when poor numbers are released, bond prices go up with the view being one of a loose monetary policy environment likely to continue.

 

The other main factor is the flight to safety/quality principle. When specific thing happen like disgruntled people targeting the west(or anywhere else) or massive natural catastrophes happen, stocks can be adversely affected and amidst uncertainty they usually are. But people need to put there money somewhere and it's usually the likes of bonds, gold and the dollar. So events such as these will send the bonds rocketing up.

 

As far as the spreads go, you basically sell one contract and buy the other in a particular ratio or vice-versa. Also common is the fly spread which is say buy one spread so e.g. long 2 yr- short 5yr and then short the next down the line in the curve so short 5yr- long 10yr. So you end up long 2yr-short 5yr-long 10yr in the specified ratio.

 

All of this should mean you are less exposed to risk as these contracts are very much linked. With that, spread traders usually do bigger size and more round trips. Brokers normally will give them favourable margin and round turn rates because of this.

 

Anyway, that's a quick(and I do mean quick) overview of these products and spreading them. I'm not saying that you have to spread them, but I think you need to be aware of the spreads and what they are doing if you want to trade them. I do think that especially the US Treasuries are pretty technical and useful to monitor with market profile, but I don't think you absolutely have to use mp either. I'll have a look to see if I can get the current spread ratios between all these products and post some charts of the spreads at some point. If anyone has the current ratios and wants to chip in, that'd be useful too.

[steve46 12]

For professionals worldwide, in banking, and adjunct business, the 10 year is the benchmark

 

Other industries (mortgage and other types of lenders for example) dovetail into that interest rate for their purposes..do some (of your own) research and you will be able to confirm that...

 

Ditto the US market....

[MightyMouse 12]

I thought the benchmark was the 30 years bond?

 

Not since Paul Volcker was Fed Chairman

[kuokam 10]

Since I live in Europe, I would like to hear more about the german treasuries, as I believe they don't trade totally like US bonds and notes. To me they look a bit trickier to trade. Also what are the best "indicators" when entering a position, an index or a different maturity treasury?

What I see right now is that the us note seems to be trading more heavily than the bund, (-0.08 against +0.02) although it is the european market that should be in full swing.

Both of them plummeted on friday, but now they seem to behave diffrently. Is there any leader-follower relationship between the bund and the note?

Edited May 6, 2013 by kuokam

[Trader Dante 10]

It's a shame this thread died. I've been looking for a good thread that focuses on Bund!