Invoice Spreads: Bond Futures, Swap Tenors, and Curve Exposure
Summary
An invoice spread pairs a bond future with an interest rate swap whose dates generally align with the future’s expiry and the cheapest-to-deliver bond’s maturity. Traders use the structure in part because bond futures are liquid and straightforward to trade, and because clearing the future and swap together may reduce margin through a clearinghouse diversification benefit. This can make the position more capital efficient than a comparable cash bond spread, which may involve repo.
The document cautions that a one-year-forward, one-year SOFR swap against a five-year bond future is not a straightforward swap-spread position: the instruments have different rate exposures. It is characterized instead as more likely a yield-curve trade, potentially expressing a steepening or flattening view in the two-to-five-year region. The discussion is qualitative and does not provide a hedge-ratio calculation, market data, or a test of how much P&L comes from curve versus spread movements.
Key ideas
- Invoice spreads commonly pair a bond future with a swap aligned to the future’s expiry and the underlying bond’s maturity.
- Bond futures offer liquidity and simpler trading than cash bonds that require repo arrangements.
- Clearing a swap and future together may reduce margin requirements through a diversification benefit.
- A forward-starting short swap against a five-year bond future can carry substantial yield-curve exposure.
- The described tenor mismatch may express a steepening or flattening view rather than a pure swap-spread view.
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Full text
# invoice spread what's the intuition # invoice spread what's the intuition I know that swap spreads are a good indicator of credit risk. When trading them, you are positioning a Treasury against a SOFR swap of similar maturity—for example, a 5-year swap against the on-the-run (OTR) 5-year Treasury. However, I've noticed that in the industry, many traders achieve a similar exposure by trading the invoice spread, such as a 1y1y SOFR swap against a 5-year bond future. The issue is that I don’t intuitively understand what this trade represents. In an invoice spread, we are trading a 1-year forward 1-year swap against a 5-year bond future. Since these two instruments have different maturities, what exactly is the rationale behind using a 1y1y swap instead of a 5-year swap against the 5-year bond future? What macro or positional view is being expressed by this trade? ## Answer by user68819 (score 3) https://quant.stackexchange.com/a/81819 Invoice spreads are usually structured as a bond future versus a swap with the same start as future expiry and end dates as the CTD underlying the bond future contract. Rationale: - Bond futures are very liquid - Easy to transact (without the head ache of repo etc). - More capital efficient than the underlying cash bond spread trades. The last point relates to the fact that CCPs like the CME will give you a large "diversification" benefit on your margin if you clear the swap & future versus them. The cost of holding your trade is therefore reduced. As to what 1y1y SOFR swaps versus 5y bond futures are, that seems more like a curve trade rather than an explicit view on the spread (i.e. the curve risk inherent in there would probably contribute more to P&L as opposed to the spread-curve). The view is likely expressing a steepening/flattening of the 2s5s region on the curve.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.