Yield Curve trading with ETF's

teflon142

Member
65 10
I've done a bit of googleing and couldn't find anything suitable.

I'm trying to find out the hedge ratio's to put a yield curve trade on via ETFs. Working out the DV01s for each one is a total ballache, if it is even possible at all (I guess that it is, finding the DV01 for each top 10 holding and weighting accordingly).

My general idea is to approximate the ETF's to the equivalent future, and use the publicised hedge ratios from the CBOT (e.g. 10yr fut ~ 3 - 7yr ETF). For instance, to put on a 2s10s, I'd use the futs ratio of 5:3 - e.g. long 5 SHY vs. short 3 IEI.

The ETFs and the futs are pretty darn well correlated, and eyeballing the charts seems to suggest the spreads are too.

My question is, am I missing something structural that will come back to bite me in the ar$e? Is there any reason why what I'm doing isn't valid?

Cheers.
 

Martinghoul

Senior member
2,690 276
Yes, this can be done...

Depending on the ETFs in question, you can do either one of the following: 1) take every single bond holding and calculate the weighted DV01 of the portfolio; or 2) take the underlying index (e.g. the Barclays US Agg) and use its published duration.

I don't think you're doing anything invalid, although you need to be aware of the various caveats arnd your strategy, whatever it ends up being. Specifically, you do need to have an idea of what sort of a curve position you're in.
 

teflon142

Member
65 10
Thanks.

Since posting I've come across the published durations... if the ETF's trade at (approx) their NAV, is it OK to use the price of the ETF to get the DV01?

For example TLT - Price = 107.04, duration ~ 16.44 (from the website), so...

DV01 = [(0.01 * 16.44) * $107.04] * 0.01 = $0.1759

or is that totally ridiculous? This is very much still on the drawing board at the moment, but if possible I'd like to take it further, looking at various trades e.g. corporates vs. treasuries (with a view on credit spreads), or TIPS vs. Treasuries (with a view on inflation).
 

Martinghoul

Senior member
2,690 276
Thanks.

Since posting I've come across the published durations... if the ETF's trade at (approx) their NAV, is it OK to use the price of the ETF to get the DV01?

For example TLT - Price = 107.04, duration ~ 16.44 (from the website), so...

DV01 = [(0.01 * 16.44) * $107.04] * 0.01 = $0.1759

or is that totally ridiculous? This is very much still on the drawing board at the moment, but if possible I'd like to take it further, looking at various trades e.g. corporates vs. treasuries (with a view on credit spreads), or TIPS vs. Treasuries (with a view on inflation).
I don't think you'll be too far wrong if you do the calculation above... However, if you want to be more precise, you might consider doing it the long way.

There's nothing wrong whatsoever with your idea of trading various stuff vs this ETF.
 
 
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