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Estimating Implied Repo for Hypothetical Deliverable Bonds

Article Quant Q&A · Author: VanillaCall
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Summary

To estimate the implied repo rate for a bond that has not yet been issued, the document recommends specifying its coupon and yield. Its issue date and maturity are treated as known; after the coupon and yield assumptions are set, the implied repo can be calculated for the futures delivery date.

Choosing those assumptions requires judgment. The suggested approach is to estimate a yield spread to current on-the-run bonds while accounting for the yield curve, liquidity premium, carry, and market conditions, with the estimate often framed as a forward spread on the delivery date. A second response describes using a financial data terminal to create hypothetical bonds, add them to a futures contract, and vary their yields relative to the current cheapest-to-deliver bond to view implied repo rates. Neither response supplies a worked calculation or validates the assumptions, so the estimates depend on the chosen coupon and yield inputs.

Key ideas

  • The coupon and yield must be assumed for a hypothetical bond; its issue and maturity dates are treated as known.
  • Estimate the assumed yield by comparing with on-the-run bonds and considering curve shape, liquidity, carry, and market conditions.
  • A forward yield spread relative to an on-the-run bond can be used for the delivery date.
  • A financial data terminal can model custom bonds alongside a futures contract and display implied repo as yields change.

Tags

Fixed incomeFuturesCarry
Full text
# How to calculate implied repo of a hypothetical bond that has not been issued?


# How to calculate implied repo of a hypothetical bond that has not been issued?












I want to calculate the implied repo to a delivery date for a series of bonds that have not been issued yet. Do I make assumptions about the bond yields on some trade settlement date and the futures invoice price?

## Answer by Helin (score 2, accepted)

https://quant.stackexchange.com/a/41290

There are two assumptions involved – the coupon rate and the yield. Everything else – maturity date and issue date – is known. Once these two assumptions are set, calculating implied repo rates is trivial.

Setting these two assumptions is of course an art. Overall, it's not all that different from analyzing any bond auction – you calculate a yield spread to the current on-the-runs, accounting for curve, liquidity premium, carry, and bad days. Most strats prefer doing this as of the delivery date; i.e., we'd "guess" a forward yield spread relative to the on-the-run issue.

## Answer by decaybeta (score 1)

https://quant.stackexchange.com/a/41323

It can be simpler than that. Just create custom hypothetical bonds on Bloomberg and then load up a futures contract. For example, TUZ8 is the December two year futures contract. Once you bring that up, add the custom bonds and then just play around with the yields shifting the spreads between the current CTD and the hypothetical bonds. They show the implied repos too on the screen.

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.