Bund, Bobl, Schatz futures

[grantx]

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.

 

[Directional]

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.

 

[salltbtch]

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
XXX

 

[Directional]

lol :cheesy:

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

 

[grantx]

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.

 

[grantx]

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.

 

[PualoP]

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.

 

[A Dashing Blade]

...
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.

 

[A Dashing Blade]

. . . i must have misunderstood your quote in that 10 year bonds are more sensitive to interest rates than two year notes!

ceterus paribus, a 10 year bond has a higher duration than a 5 year bond??

 

[grantx]

Lady and Gentlemen,

Obvious, I suppose – the greater the duration, the greater the uncertainty (hence higher yields).

PualoP,

Thank you for the info. I’m looking at Macaulay, modified and convexity. Is “pull to redemption” the same as “pull to par” and/or “basis convergence”?

As with Tricky Trichet, so with Bernanke yesterday (see attached doc, 1-minute charts).

From the tone and kisses I think saltbtch is Arbitrageur’s bitch.

DB,

Thanks for the clarification. Floreat Etona.

Grant.

 

[Directional]

Hope all’s well in Riga.

Any idea what’s happened to NQR of T2W?

so far so good mate, it apparently gets rather cold here in the winter tho! the eye-candy gets all covered up in furs, which spoils the view a tad.

not sure about NQR unfortunately.

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've never looked at Eurex prices for Euribor futures - whats the spread like on the bid/ask for Sep08? I'm looking at 95.780 for 300, 2500 at .785 this moment...

the volume for the 'bor is on LIFFE - there'd unlikely be any arb opportunities because the spread on eurex will be wider and this would eliminate most all bid/ask overlap between the two.

 

[grantx]

Arbitrageur,

Spreads are wider on Eurex. See attached .doc.

Have I got the Ask size, Bid size wrong way round?

Why are these traded at a disadvantage to LIFFE's?

Grant.

 

[Directional]

Have I got the Ask size, Bid size wrong way round?

Why are these traded at a disadvantage to LIFFE's?

um, possibly they could be the other way round, i guess it depends how you like to look at them! :cheesy: I usually have the bid on the left and the ask on the right, simply because thats the way it is in my price ladder and its always been that way.

it seems like the eurex prices are two ticks wide, the euribor trades in "half ticks" on liffe. its also thin - just 12 up.

As to why... well, its the same reason why any exchange has a hard time cloning any other established instrument on another exchange (ie: Eurex US vs CBOT). traders will go where the liquidity is, if you cant do much size, you cant get a fill on the inside edge uness price actually trades through, and you have to pay up two ticks for a market order. Its like spreadbetting :cheesy:

 

[grantx]

Arbitrageur,

“um, possibly they could be the other way round, i guess it depends how you like to look at them!”

If you give up trading, you can always join the diplomatic corp.

I’ll explain my confusion. My equities background told me to sell the bid, buy the offer/ask. Now, with futures (on DOM, for example) we have the buyers on the bid side, sellers on the ask side.

Correcting quotes as per your hint, I have Bid size, Buy – Sale, Ask size.

Dashing Blade actually provided an good explanation of the underlying rationale for all this.

Out of interest you may like to look at the following from Makosqu (Elite Trader forum) re the DOM (attached. You may need to scroll up):

My question:

I'm trying to get a grip on the significance of price/volume and I need help and advice.

Please look at the attached snapshot Depth of Market of the DAX future.

What would be an initial assessment from the information presented?

Makosqu

The DOM by itself says two things.

1. LONG price change is up (ie. 10 vs 56)

2. It is IMMINENT, the instrument is running out of offers (ie. 10 vs 56)

(Need clarification on this: why should 10 offered vs 56 bid be bullish? If the figures basically represent supply, aren’t you assuming a demand - where is it? Supply doesn’t imply demand.

Which are the most significant elements?

There are several actually.

1. SUPPLY imbalance/bias

2. Intra Bid/Ask Pair SUPPLY changes (ie. INCR, DECR, FLAT)

3. The rate of 2

4. Inter Bid/Ask Pair dominance (ie. latter vs former pair dominance/residence on your tick chart)

5. OverAbundance/"Wall" (ie. B.Contract/B.Chart vs S.Contract/S.Chart) - this is where real/conventional resistance is actually "seen".

Is it bullish or bearish?

IMMINENTLY LONG. After several ticks (ie. 4560+), the SUPPLY favors SHORT. However, the tape would confirm which held. Additionally, knew SUPPLY information will get filled in on the left after the IMMINENT LONG arrives.

If I was looking to buy, does the information suggest predominantly upward (buying) pressure?

Or, if I was looking to sell, does the information suggest predominantly downward (selling) pressure?

Pressure is on the TAPE! There is no volume reading on the DOM, just an indication of the direction from which volume can be taken from... Predominance is on a chart and is established by measuring the size of the herd of traders over some regular interval that are executing orders. The band of small herd size values informs you that the herd is imminent and will soon establish what is going to be predominant.

Grant.

 

[bond_trader1]

I’ll explain my confusion. My equities background told me to sell the bid, buy the offer/ask. Now, with futures (on DOM, for example) we have the buyers on the bid side, sellers on the ask side.

OMG, this explains a lot of things....so if I read that bids are being hit in the Bund does that mean traders are buying? I have experience with equities and always assumed a statement like that would mean traders were selling...

 

[grantx]

Bond trader,

There is a logic to this (once/if you/I understand it): the buyers are bidding, the sellers are offering. Hitting the bid means the buyers/longs will (possibly) have to lower their bids, hence the falling/weakening market connotation with “hitting the bid”. Conversely, lifting/taking the offers - sellers/shorts will be pressured to accept higher offers, hence stronger prices.

Never had this problem with interest rate swaps arbitrage.

Grant .

 

[Directional]

without wishing to further muddy the waters, I'd always understood that if you "hit" the bid or ask, you're lifting the spread - hence you, as a seller, would be hitting the bid from those who want to buy... i'd understood the bid (in futures) being hit meant sellers were hitting it.

Buying the bid, means joining the bid on the inside edge as a buyer.

 

[grantx]

Arbitrageur,

I’ll accept your version. It’s giving me a headache.

Have a good weekend, mate. Don’t drink too much.

Grant.

 

[TGM]

Hitting a bid = selling at the market

Taking an offer = buying at the market

you cannot hit an offer (at least not in chicago!)

Lifting is a whole other topic----"I lifted offers way below the market" ---means you got mean ass fill on ur longs in big selloff and some stoolies got robbed




how ya doing ARB?

 

[grantx]

TGM,

“you cannot hit an offer (at least not in chicago!)”. I think an English Gentleman could. Not many in Chicago.

Grant.