Bonds Question

Synonym

Active member
105 2
Hi All
have decided to re-post this here as i think i originally posted t on a dead thread.

I have been trading a good while but i am new to bond markets. I am looking to actively and position trade UK and Japanese bonds (later US) - will be looking for the turn (longer term interest rates to rise) and then shorting the bonds.

Having trouble clarifying what the exact trading contracts represent. Looking on Liffe's site. They offer Short Sterling Contracts (that as i understand, are also called STIRS (Short term Int Rate Futures). I understand these are priced at 100 minus the expected sterling interest rate, i.e. if rate is 1%, future will be quoted at 99 (100-1). I don't think these are the best vehicles for what i want to do as they only really deal with the short end of the curve (relatively near term
Int Rates).

So Liffe also have Short & Long Gilts contracts. I want to clarify what these are and how they trade. I presume they are futures reflecting the price of a bundle of UK Govt bonds/Gilts. Despite looking on the liffe pages

https://globalderivatives.nyx.com/en/contract/content/29097/contract-specification

I do not understand how they are priced and how prices react to changes in interest rates/yields.

Can anyone cut through the jargon for me and help me get this clear?

Many thanks in advance to anyone who can and does!

Also very happy if anyone has suggestions as to how best/simplest way to short the medium to Long Term In Rates of the UK and Jap.

Syn
 

tripleogstar

Established member
659 29
Hi All
have decided to re-post this here as i think i originally posted t on a dead thread.

I have been trading a good while but i am new to bond markets. I am looking to actively and position trade UK and Japanese bonds (later US) - will be looking for the turn (longer term interest rates to rise) and then shorting the bonds.

Having trouble clarifying what the exact trading contracts represent. Looking on Liffe's site. They offer Short Sterling Contracts (that as i understand, are also called STIRS (Short term Int Rate Futures). I understand these are priced at 100 minus the expected sterling interest rate, i.e. if rate is 1%, future will be quoted at 99 (100-1). I don't think these are the best vehicles for what i want to do as they only really deal with the short end of the curve (relatively near term
Int Rates).

So Liffe also have Short & Long Gilts contracts. I want to clarify what these are and how they trade. I presume they are futures reflecting the price of a bundle of UK Govt bonds/Gilts. Despite looking on the liffe pages

https://globalderivatives.nyx.com/en/contract/content/29097/contract-specification

I do not understand how they are priced and how prices react to changes in interest rates/yields.

Can anyone cut through the jargon for me and help me get this clear?

Many thanks in advance to anyone who can and does!

Also very happy if anyone has suggestions as to how best/simplest way to short the medium to Long Term In Rates of the UK and Jap.

Syn

The gilt futures prices are essentially representing the delivery of a bond on expiry of the futures contract. On the LIFFE website it should say what the deliverable bonds are, I believe the maturity of the cash bond has to be between 8-10yrs. There is a basket of deliverable bonds, but on expiry of the futures contract, the trader who is short the futures will obviously only deliver the 'Cheapest to deliver' (CTD) bond. So the gilt futures price will track the CTD bond. So trading Long gilt futures is your best tool for trading the long end of the UK bond market, similarly for the japanese market you could trade the JGB futures. Short sterling contracts are also good, because you have to remember, although it represents a 3month forward rate (i.e the shorter end of the yield curve), it is highly correlated with the gilt curve, but you must remember, the interest rate that the short sterling contract represents is different to what the uk gilt curve represents. short sterling represents 3month LIBOR, whereas uk gilt is obviously the cost of uk govt to borrow money for x number of yrs.
 

Synonym

Active member
105 2
The gilt futures prices are essentially representing the delivery of a bond on expiry of the futures contract. On the LIFFE website it should say what the deliverable bonds are, I believe the maturity of the cash bond has to be between 8-10yrs. There is a basket of deliverable bonds, but on expiry of the futures contract, the trader who is short the futures will obviously only deliver the 'Cheapest to deliver' (CTD) bond. So the gilt futures price will track the CTD bond. So trading Long gilt futures is your best tool for trading the long end of the UK bond market, similarly for the japanese market you could trade the JGB futures. Short sterling contracts are also good, because you have to remember, although it represents a 3month forward rate (i.e the shorter end of the yield curve), it is highly correlated with the gilt curve, but you must remember, the interest rate that the short sterling contract represents is different to what the uk gilt curve represents. short sterling represents 3month LIBOR, whereas uk gilt is obviously the cost of uk govt to borrow money for x number of yrs.

Thanks for the reply Tripleogstar and the useful info. I clearly need to do a little more research and reading into exactly how the pricing of the Gilt Futures work. As an aside, do you (or anyone else for that matter) know of a good free webcharts service for trading these bonds? Ideally something where you can save your own marking-up on the charts?
Cheers again
Syn
 
 
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