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kfcnhl
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Posts: 9
Joined: July 28th, 2009, 3:56 pm

Newbie bond arb question

February 22nd, 2017, 1:34 am

Buy 10 year treasury financed by simultaneous repo
Swap 10 year treasury bond based on 10 year swap rate and receive 3 month float.
Since 10 year treasury was higher than 10 year swap rate, you have a positive carry on the whole.

As the 10 year gov/swap narrow in recent month, I think the trade above should be losing money.
I couldn't really identify how, please help.
In general, what are the risk with the trade above.
Also, if I want to bet that the gov/swap spread is going to narrow ie gov - swap move from negative to positive, what are some of the ways I can structure this trade.

Many many thanks,
Newbie 
 
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DavidJN
Posts: 242
Joined: July 14th, 2002, 3:00 am

Re: Newbie bond arb question

February 22nd, 2017, 5:01 am

What is the term of the repo? There's a basis or two in the short legs. Is the 10-yr Treasury on-the-run? Lots of things to think about.
 
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DavidJN
Posts: 242
Joined: July 14th, 2002, 3:00 am

Re: Newbie bond arb question

February 22nd, 2017, 4:26 pm

Is the asset swap a par asset swap or a market asset swap?
 
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Martinghoul
Posts: 188
Joined: July 18th, 2006, 5:49 am

Re: Newbie bond arb question

February 22nd, 2017, 6:11 pm

3m UST GC is arnd 75bps; 3m LIBOR is 1.05.

10y UST is arnd L+2 (headline spread), so yes 10y spreads give you positive carry, and roll (although not that much of the latter). 

In recent months, 10y spreads have gone from L+18 to L+2, so this trade (long 10y UST, pay fixed on 10y swap) would have been making money.  As to the trade and the structure, you have to make up your mind.  Do you want to be long or short UST?  There are lots of risks any which way you go.