Rolling over "Long Gilt Futures"

[Martinghoul]

Please allow me to have one final stab before giving up.

The long buys a future priced at £100 (assuming a £5 margin requirement) he borrows £95 at LIBOR (0.5%). This £100 is paid over to the shorter . The CTD price at this point should be greater than £100 because the shorter has to pay the coupon to the long.

At expiry, the short goes out to buy the CTD gilt and delivies this to the long. The long repays the £95 plus interest at LIBOR.

feel like giving up-this is quite difficult.

Yes, this is about right, I think.

As to giving up, don't. There's very little fundamentally different about this stuff. It's exactly like an stock or an ETF or whatever that pays a dividend. Once you get it clear in your head, you won't have any difficulty with it.

 

[bullboy8]

Martinghoul, interesting for you to reveal your views on gilts...I think jap yields are approx 1% but i beleive theres a good reason for that-they have deflation so even at 1% they get positive returns plus domestic savers soak up most of the G bond issuance. We can't say the same for Gilts. I agree with you, gilts maybe the trade of the century but i hesitating to trade in something that i don't yet fully understand (cost of carry and rolling over issues).

Oh, and how do you short gilts (that's assuming u do). Difficult market for spotting investment opportunities at the mo-the only one on my to buy list is short gilts but the vehicle is a little out of my comfort zone. What's on yours? A couple of months ago was pibs, corporate bond-some good yields were kicking around.

 

[Martinghoul]

Martinghoul, interesting for you to reveal your views on gilts...I think jap yields are approx 1% but i beleive theres a good reason for that-they have deflation so even at 1% they get positive returns plus domestic savers soak up most of the G bond issuance. We can't say the same for Gilts. I agree with you, gilts maybe the trade of the century but i hesitating to trade in something that i don't yet fully understand (cost of carry and rolling over issues).

Oh, and how do you short gilts (that's assuming u do). Difficult market for spotting investment opportunities at the mo-the only one on my to buy list is short gilts but the vehicle is a little out of my comfort zone. What's on yours? A couple of months ago was pibs, corporate bond-some good yields were kicking around.

Yes, 100% agree with you on JGBs. Yet, look arnd the internet and even on this forum, you will find countless discussions of how being short JGBs is THE big trade. Problem is that it's been a big trade for more than a decade and countless big names (Robertson, Paulson, Einhorn, more recently Kyle Bass) have been taken to the cleaners over it. It's all about the timing again and it's very very tricky.

If I were to short gilts w/conviction (I don't at the moment), I would just sell the futures, close my eyes and accept the negative carry as the inevitable cost of expressing the view (it's just that w/futures you pay your negative carry in lumps). I don't really have any particularly good ideas at the moment. I play w/FX every now and then. The only other thing I have been looking at recently had been buying high-quality German utilities or corps. I also keep an eye on anything NS&I comes out with, 'cause it's often pretty good. Other than that, I got nuthin'.