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Carry, Slide, and Residual Risks in a Treasury CTD Basis Trade

Article Quant Q&A · Author: Transcending
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Summary

The document clarifies how slide or rolldown relates to basis net of carry (BNOC) in a Treasury futures trade based on the cheapest-to-deliver bond. To calculate net basis, the response says to account for all economic effects before delivery, including carry and slide. However, the position defined as a pure net basis trade is constructed to remove those pre-delivery exposures, so slide is not a residual source of return in that idealized position.

In practice, the CTD is commonly financed through repo. Overnight repo leaves exposure to rates over the remaining period, which traders may hedge with Fed funds or SOFR futures, or manage through term repo. Term repo can remove that stub-period exposure, leaving delivery-option risks such as a CTD switch or the futures wild card. The explanation distinguishes the calculation of net basis from the risk profile of a hedged position; actual exposures depend on funding and hedging choices.

Key ideas

  • Net basis calculations account for economic effects before delivery, including carry and slide.
  • A pure net basis position is structured to remove pre-delivery slide and other exposures.
  • Financing the CTD with overnight repo leaves residual rate exposure during the stub period.
  • Traders may hedge that exposure with rate futures or use term repo.
  • After term repo funding, delivery options such as a CTD switch remain relevant risks.

Tags

Fixed incomeFuturesCarryRisk management
Full text
# Carry/slide on Treasury CTD basis position


# Carry/slide on Treasury CTD basis position












I'm trying to understand whether a long CTD basis position needs to incorporate slide/roll when computing basis net of carry (BNOC).

I am told the answer is no but I am not sure why. I am well aware of carry as an important consideration in the context of BNOC and one needs to subtract out the pure carry on the CTD, i.e. the coupon income - financing/repo cost to gauge relative value in futures. However, why wouldn't slide/roll also be netted out in the calculation? If you're long the basis and you own the CTD then that bond will generate some rolldown yield or slide on a daily basis (equal to the 1/number of business days until delivery * total roll to delivery date).

Some guesses I have are that the assumption of static yield curve for roll is too limiting and/or long basis traders typically lend out the CTD in repo and in that case they wouldn't earn slide but I don't think this is the answer. Any thoughts?

## Answer by dm63 (score 4, accepted)

https://quant.stackexchange.com/a/76289

“understand whether a long CTD basis position needs to incorporate slide/roll when computing basis net of carry”. I’d say (a) yes in order to compute net basis, you have to subtract all economic effects prior to delivery (b) just to be clear, a pure net basis position is not exposed to any roll or slide or anything else that goes on prior to the delivery date.

Also you raise some questions about how basis traders operate. In almost all cases the ctd is funded using repo (otherwise you are using expensive unsecured funding). If overnight repo is used, there is a remaining long rates exposure in the stub period. This is usually hedged with Fed funds or SOFR futures , or by term repoing the CTD. A pure net basis position is obtained only if term repo has been used. Then all you have left unhedged is the long delivery option (ctd switch, wild card, etc).

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.