Bund, Bobl, Schatz futures

This is a discussion on Bund, Bobl, Schatz futures within the Futures & Options forums, part of the Markets category; I'm assuming these are driven, to various degrees, by the same factors. Does one dominate or take the lead in ...

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Old Sep 17, 2007, 5:35pm   #1
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Bund, Bobl, Schatz futures

I'm assuming these are driven, to various degrees, by the same factors.

Does one dominate or take the lead in any move? For example, if the bund sells off, will the others follow?

Whilst the bund has the greatest volume (and liquidity?) I would guess the schatz - at 2-years - would be more sensitive to interest rate concerns, then the bobl (5-years), then the bund (10-years). This isn't borne out by observation over short periods (tick).

Attached is a snapshot of Time and Sales for, left to right, bund, bobl, schatz illustrating a lack of correlation.

Or is any movement independent, driven purely by long/short positions or inter-month spreads?

(I've got a stack of literature from Eurex but haven't got round to reading it , so I am being somewhat lazy.)

Any comments welcome.

Grant.
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Old Sep 18, 2007, 7:31am   #2
 
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Originally Posted by grantx View Post
I would guess the schatz - at 2-years - would be more sensitive to interest rate concerns, then the bobl (5-years), then the bund (10-years). This isn't borne out by observation over short periods (tick).
i believe its the inverse - the bund as a ten year bond, is more sensitive to speculation about how interest rate changes will affect pricing because there are ten years till maturity. A lot can happen in ten years, and although there can be some measure of certainty over near term interest rates, the tail end of the interest rate yield curve can move around a fair bit as central bank sentiment changes.

The Shatz as a two year bond is much less sensitive because near term interest rate policy is much less open to speculation.

But you're right that there is a measure of correlation, and this is why the Bund/Bobl/Shatz are traded as hedgeable spreads with margin breaks from the exchange.

There is also a measure of correlation between these bonds and the Euribor interest rate futures, hence why some spreaders trade the bund/euribor, bobl/euribor or shatz/euribor combination - due to the effect of interest rates vs bond prices, the bund pricing will be in some measure based on what the back months of Euribor STIR futures are trading at.
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Last edited by Directional; Sep 18, 2007 at 7:36am.
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Old Sep 18, 2007, 6:48pm   #3
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Arb,
u are a legend, but i must have misunderstood your quote in that 10 year bonds are more sensitive to interest rates than two year notes!
the further you go down that curve the mpre its about inflation and growth (and hence future interest rates) but like a novice you mistake the cost of ten year borrowing to be the same as what interest rates will be in ten years time.
typical of a futures trader.
but i love you
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Old Sep 18, 2007, 8:00pm   #4
 
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lol

cheers for the insight and correction... i did start off by saying "I believe..." though as you point out, there may be a tradeable spread between what I belive and what is actually fact
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Old Sep 19, 2007, 12:48am   #5
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grantx started this thread Arbitrageur,

Your reply is a great help, especially the Euribor reference.

My thinking re relative change was based – perhaps falsely – on an analogy with the implieds for index options, ie front-month volatilities being more volatile than back-months.

Started the Eurex literature but I fear it may be somewhat basic. Not to worry, maybe Fabozzi can help.

Hope all’s well in Riga.

Any idea what’s happened to NQR of T2W?

Thank you, mate.

Grant.
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Old Sep 19, 2007, 2:40am   #6
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grantx started this thread Arbitrageur,

Compared to LIFFE, Eurex's Euribor futures are pretty illiquid (more like dust) but would it be reasonable to assume the prices are pretty good to due to potential arbitrage?

I don't subscribe to LIFFE but will if necessary. Cost isn't the issue (says he not wishing to appear a tight fcku). You know what I mean.

Grant.
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Old Sep 19, 2007, 2:51am   #7
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10 year bonds are more sensitive to interest rates than shorter dated bonds, so the bund is more sensitive to interest rate changes than the schatz.

Arbitrager pretty much summed it up for you. The academic name for it is the 'Pull to redemption'. The LONGER the bond has to redemption and the LOWER the coupon offered, the more sensitive it will be to interest rates. The Bund, Bobl and Schatz futures all have the same 6% coupon so sensitivity is purlely down to time to redemption.

If you want to actually calculate this stuff for yourself or do some further reading look up 'Modified Duration' and 'Convexity' or if you want to see this stuff in action just watch the 3 products when Trichet makes his post rate descioson statement.

I have no idea what salltbtch is going on about.
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Old Sep 19, 2007, 2:29pm   #8
 
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Originally Posted by PualoP View Post
...
The LONGER the bond has to redemption and the LOWER the coupon offered, the more sensitive it will be to interest rates. The Bund, Bobl and Schatz futures all have the same 6% coupon so sensitivity is purlely down to time to redemption.
At an extreme case, think about it if they has no coupon ie we zero-couipon bonds.
As such they would be priced to the net present value of the principle repayment at maturity

ie what's the value now of the 100 that I'm gonna get in 2, 5 and 10 years

clearly if interest (say) rise, then the npv of 100 in 10 years is less than 100 in 5 years.

it's kinda like the inverse of investing money at 5% componded for 5 or 10 years, clearly in this case you get more money at the end of 10 than 5.
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