Hedging Bond Curve Risk with Treasury Futures

Summary

The document asks how to hedge the curve exposure left after neutralizing the parallel DV01 of a nine-year bond with a short position in ten-year Treasury futures. It proposes comparing the bond-versus-ten-year and five-year-versus-ten-year DV01 differences, then using their ratio to estimate the five-year hedge needed to offset the residual 9s10s exposure.

This is a proposed calculation, not a validated procedure: the text provides no worked example or answer. Modified duration alone may not capture the relevant key-rate exposures, and a practical hedge also depends on the futures contract’s conversion factor, cheapest-to-deliver bond, and chosen risk measure. The proposed ratio is therefore a starting question about curve hedging rather than a complete implementation method.

Key ideas

• A hedge that sets total DV01 to zero can still retain curve exposure.
• The question considers using five-year and ten-year Treasury futures to hedge a nine-year bond.
• It proposes comparing relative DV01 exposures across the 9s10s and 5s10s spreads.
• The document does not confirm the proposed hedge-ratio calculation or provide a worked example.

Tags

# Hedging Curve Risk with Futures


# Hedging Curve Risk with Futures












Please help confirm/correct my understanding of hedging curve risk using futures.

For example, if I purchased a 9y bond and hedged the duration risk (parallel shift) by shorting 10y treasury futures making net DV01 equal to zero, I would still have curve risk (e.g. risk of 9s10s steepening). If I could only hedge using 5y and 10y treasury futures due to liquidity, how do I calculate how many 5y futures and additional 10y futures are needed to hedge the 9s10s curve risk?

I understand that I need to use modified duration – would the below method be correct?

(9y modified duration * notional) - (10y future modified duration * notional) = 9s10s curve DV01

(5y future modified duration * notional) - (10y future modified duration * notional) = 5s10s curve DV01

Curve Hedge Ratio = 9s10s curve DV01 / 5s10s curve DV01

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