A basket of bonds are deliverable (with anything between 6.5 - 10 yrs till maturity), during a window of time, for each 10yr future contract.
If you assume that you know the Cheapest to Deliver bond (you can probably find out which bonds are currently deliverable from the CBOT), and their conversion factors (where the 6% comes in)... and assume that the Bond will be delivered on a specified day during the delivery month, you can find the Present Value of the CTD Bond from the future and work out the yield on the cash bond from there...
... However, I suspect that this is a little more work than you need to go through, and the 10yr yield you get might be different to that readily available in the market (it's a messy process) - the CTD bond may be artificially inflated due to a short squeeze on the futures, or there may not be the demand for it in the market if it has an unpopular duration, which knocks out the yield from "fair" value too(these are guesses, I have no idea if this happens at all).
If you want to know what 10yr yields are, better refer to an Index IMO - e.g. TNX (Bloomberg.com: Investment Tools) - or just use the headline rate from some of the popular vendors.
If you assume that you know the Cheapest to Deliver bond (you can probably find out which bonds are currently deliverable from the CBOT), and their conversion factors (where the 6% comes in)... and assume that the Bond will be delivered on a specified day during the delivery month, you can find the Present Value of the CTD Bond from the future and work out the yield on the cash bond from there...
... However, I suspect that this is a little more work than you need to go through, and the 10yr yield you get might be different to that readily available in the market (it's a messy process) - the CTD bond may be artificially inflated due to a short squeeze on the futures, or there may not be the demand for it in the market if it has an unpopular duration, which knocks out the yield from "fair" value too(these are guesses, I have no idea if this happens at all).
If you want to know what 10yr yields are, better refer to an Index IMO - e.g. TNX (Bloomberg.com: Investment Tools) - or just use the headline rate from some of the popular vendors.
Coupons
Martinghoul
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Galen Burghardt is the name and 'Treasury Bond Basis' is the book!
MrMiyagi
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thanks MrGecko,understood
Burghardt's book looks like the right place to start, thanks...
MrMiyagi
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I bought that damn thing about five years ago when I was at the beginning of my trading education thinking it was a laymans intro! that bloody book is the reason I'm stupefied by STIRs and Bonds...
Must fish it out of pond and see if I can understand at least the foreward
cheers all
Rhody Trader
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The Fabozzi book tends to be considered the bible of fixed income by participants. It's a daunting text, though. I think a greatly practical book is The Bond Market by Christina Ray, if you can find a copy.
fxtraderanalyst
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What Rhody said... I have the Fabozzi book but, i really didn't think he explained things very well...like Macaulay duration and such. Anyway, yeah it is considered the bible in fixed income though....just my 0.02 cents...
Martinghoul
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Don't like Fabozzi... My personal FI bible is 'Fixed Income Securities' by Tuckman.
tripleogstar
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Does anyone know if there exists a mathematical relationship between the CTD bond and other bonds. For example, in the gilt market, traders price their bonds off the CTD bond. For each basis point increase in the yield of the CTD bond, the yield on all the other bonds (all maturities) also increases by 1 basis point. The traders then obviously adjust the yield on each different maturity seperarely. I just wanted to know why the bonds are priced this way.
tripleogstar
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Could someone also explain why the basis of a low duration bond increases as yield increases.
Martinghoul
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Hmmm, with everything else unch (repo, single bond in the basket, no optionality), increase in yield means increase in basis for any bond. It's easy enough to figure out the reasoning behind this by just considering what happens to the carry you earn on the bond position when yield rises.
A Dashing Blade
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? No idea what this means
No they don't (unless the yield curve is perfectly flat obviously).
No they don't.
They're not
tripleogstar
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I have a friend who works as a gilt market maker and says that this is how it is priced. I have also had experience on a gilts desk and this is how the centralised pricer tends to work out the yield for all bonds. There is a link between the CTD bond and all the other bonds, that is for sure. But it is a bit confusing as to why it is priced this way. I think you need to improve your knowledge of gilts market making before you make comments buddy
tripleogstar
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and with regards to the 'unless the yield curve is perfectly flat', that is a ridiculous comment mate, i think you need to learn your basics. All bonds will have their own prices and therefore their own yield. SO to start with you will have a particular shape of the yield curve. A 1 basis point move in the CTD bond which causes a 1basis point shift in all other bonds, will simply cause a parrallel shift, it is not a case of 'perfectly flat' curve. The different areas of the curve are then adjusted by the trader.
Martinghoul
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Sometimes you can look at the bonds in the basket and think of how the futures are affected when you move the CTD 1bp and assume all the other bonds move the same. That's kinda looking at the futures basket with a parallel curve shift. However, that's not really how I, personally, like to look at the basis, if there's switching involved. The whole point is that you want to look at the bonds in the basket under different scenarios, with the curve not just moving parallel, but steeper, flatter, etc. Then you look at what happens to the CTD and the futures. It's a bit of an art, not a science, but if you do it long enough, you get to know and love the steps...