Mark-to-Market PnL in a Treasury Basis Trade

Summary

The document poses a fixed-income spread-trade question: whether a long Treasury bill position hedged with short fed funds futures earns mark-to-market profit equal to the bond’s DV01 times a five-basis-point tightening in the quoted spread. The trade is described as earning a stated spread over the futures reference, then experiencing a smaller spread premium.

It does not provide an answer, calculation, or supporting evidence. The central learning point is therefore the distinction between posing a PnL approximation and establishing it: the result depends on how the spread is defined and on the relative rate sensitivities of both legs. A bond DV01 alone may not capture the futures hedge’s contribution or residual exposure. The question is useful as a prompt for analyzing basis-trade valuation, but the document leaves the required conventions and exact hedge sizing unspecified.

Key ideas

• The example pairs a long Treasury bill with a short fed funds futures hedge.
• The trade begins with a positive spread premium over the futures reference.
• The question asks whether spread compression translates into bond DV01 times the change in spread.
• The document gives no answer, so hedge sizing and the sensitivities of both legs remain unresolved.

Tags

# PnL of a "buying the basis" spread trade - US treasury


# PnL of a "buying the basis" spread trade - US treasury












Let's say you buy a bond (bill to keep it simple), and short a strip Fed fund futures to hedgr and pick up a spread of let's say FFE+10bps.

If this spread were to compress 5 bps, to FFE+5bps, is that MTM PnL of the trade simply the dv01 of the bond * 5 bps?

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