Interpreting Spikes in Treasury Futures Implied Repo
Summary
The document discusses a time series of implied repo for the cheapest-to-deliver bond in a Treasury futures contract. The author finds that implied repo tracks SOFR reasonably well but has sharp spikes, especially near the end of the delivery month, and asks whether these reflect genuine basis-trade economics or a plotting issue. The reported calculation uses contract-specific data and the contract economics, rather than relying only on an annualized rate that can become unstable as delivery approaches.
After correcting a date mismatch and using an earlier roll date, the author attributes some remaining spikes to market activity. A potential rise ahead of a cheapest-to-deliver switch is linked to traders adjusting cash-bond hedges and selling pressure on the bond; moves near the start of delivery month may reflect increased rolling by structural longs and short-side funds. These explanations are plausible interpretations from the observed series, not a general quantitative test. Date alignment, roll conventions, and contract-specific market dynamics matter when interpreting the plot.
Key ideas
- Use contract-specific futures and bond data when calculating implied repo through time.
- Date mismatches and roll-date choices can affect the apparent pattern in an implied repo series.
- Anticipation of a cheapest-to-deliver switch may move the cash bond price and implied repo.
- Rolling activity near delivery can contribute to spikes in futures prices and implied repo.
- The proposed market explanations are interpretations of observed moves rather than demonstrated general rules.
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Full text
# Plotting Treasury Futures implied repo over time: what should the time series look like?
# Plotting Treasury Futures implied repo over time: what should the time series look like?
Treasury futures beginner here, I was playing around with ZN data and produced the below plot of 10y TN futures CTD implied repo over time. It tracks SOFR reasonably well, but I'm surprised with how spiky it looks, mostly in the last few trading days of the delivery month. Here I'm using actual contract-by-contract data from DataBento, not the continuous ZN=F series from yfinance, for instance.
The spikiness persists even after moving to an earlier roll date (e.g. 40 days before last trading day). Also, the spikes are not due to annualization (dividing by a vanishing number of days), they're present in the actual time series $\frac{Futures\cdot CF + AI + Coupons}{CTD_{dirty}}$, i.e. the actual contract economics.
My question is: are the economics of the ZN basis trade truly this volatile, even before the delivery month? What is the conventional way of visualizing implied repo over time?
## Answer by WithinCellsInterlinked (score 0)
https://quant.stackexchange.com/a/85577
Thanks @dm63 and @nbbo2 for your suggestions. I fixed a date mismatch bug and switched to an earlier roll date (5d before deliv month start).
The few spikes that remain I think are actually down to market moves, with a few different explanations:
- Spikes up just before a CTD switch: basis traders anticipate switch and change their long-cash-CTD hedge, selling pressure brings down price of CTD, which brings up implied repo
- Spikes up or down before delivery month starts: increased rolling activity from both structural longs (asset managers) and shorts (hedge funds) causes spikes in the actual futures price.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.