Hedging an Off-the-Run Treasury Bond with Futures

Summary

The document considers how to hedge an 11-year off-the-run Treasury bond when direct access is limited to on-the-run securities. Its practical suggestion is to use the Treasury futures contract with duration closest to the bond and determine an appropriate hedge ratio.

The answer reflects a mutual fund manager’s constraints and experience, rather than a detailed pricing or optimization analysis. It specifically leaves liquidity risk unhedged, so the approach addresses duration exposure while accepting that the off-the-run bond may behave differently because of liquidity. No hedge-ratio calculation, empirical comparison, or performance evidence is provided.

Key ideas

• Choose the Treasury futures contract whose duration is closest to the off-the-run bond.
• Estimate an optimal hedge ratio for the selected futures contract.
• The proposed hedge leaves liquidity risk exposed.
• The recommendation is based on practical experience and a mutual fund manager’s trading constraints.

Tags

# How to hedge an off-the-run bond?


# How to hedge an off-the-run bond?












Let's say we have an 11-year off-the-run Treasury bond, but we only have access to on-the-run Treasury bonds. How do we hedge?

## Answer by Richi Wa (score 3)

https://quant.stackexchange.com/a/21342

As the manager of a mutual fund (not a hedge fund) you can only short treasury futures. So you take the one that is clostest in duration, look for an optimal hedge ratio and that's it.

In my experience you have to leave liquidity risk open.

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