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fyvr
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bond futures vs CTD yield conundrum

September 29th, 2020, 5:17 pm

The Dec20 Bund contract trades at 174.46 - this is the price of a hypothetical 6% 10yr bond, with a yield of -1.04%.
The CTD yields -0.59%... that's 45 bp away! For a pair of bonds of the same credit and same maturity!

Now I know there are distortions - YTM ignores term-structure (but the curve is pretty flat, so that's unlikely to be a big deal), there are convexity effects associated with the super-high coupon, yadda yadda. But this has always been true, and I've never seen the implied yield of the Future drift more than a handful of bp from the yield of the CTD. Anyone got any thoughts?

(PS there's no obvious arb or mispricing - the implied repo is bang on-market).
 
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wickedwit
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Re: bond futures vs CTD yield conundrum

January 4th, 2021, 2:01 pm

the yield on the future is the same as the ctd. The term structure isn't really relevant.
 
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bearish
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Re: bond futures vs CTD yield conundrum

January 4th, 2021, 10:40 pm

the yield on the future is the same as the ctd. The term structure isn't really relevant.
That is one person’s opinion, but not the market standard convention. The current 10 year Bund contract is quoted around 178, corresponding to a notional yield of -125 bps, while the deliverable bonds are all trading with yields around -60 bps. There is a huge difference between a 6% coupon bond and a zero coupon bond. Annoying, but whatever...
 
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wickedwit
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Re: bond futures vs CTD yield conundrum

January 5th, 2021, 12:29 am

can you show me the DLV screen for that?
 
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bearish
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Re: bond futures vs CTD yield conundrum

January 5th, 2021, 1:20 am

Not as easily as you might think, just because I try to keep some things separate from each other. But it shows the CTD as DBR 0 02/15/30 with a price of 105.99, a conventional yield of -0.6366, a conversion factor of 0.594076 and a repo rate of -0.549.
 
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wickedwit
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Re: bond futures vs CTD yield conundrum

January 9th, 2021, 10:50 pm

What is this notional yield of -125 bps you mention? Also I believe the conversion factor prices the bond to a 6% yield to maturity not a 6% coupon.
 
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bearish
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Re: bond futures vs CTD yield conundrum

January 9th, 2021, 11:52 pm

We can obviously have opinions on how these contracts should be defined, and feeling and emotions about them, but the good people at Eurex actually documents the specs:

https://www.eurex.com/ex-en/data/cleari ... on-factors
 
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wickedwit
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Re: bond futures vs CTD yield conundrum

January 10th, 2021, 3:05 am

I'm not seeing anything here about notional yield
 
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wickedwit
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Re: bond futures vs CTD yield conundrum

January 10th, 2021, 3:06 am

what is the definition of notional yield?
 
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bearish
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Re: bond futures vs CTD yield conundrum

January 10th, 2021, 12:11 pm

The yield to maturity on the notional underlying bond when assigned the futures price scaled by the conversion factor. The yield itself is not part of the contractual spec. It’s just a market convention.