Reconciling Bond Settlement, Repo Accrual, and Daily P&L
Summary
The document discusses apparent weekday swings in the P&L of a short eurozone bond position, where settlement occurs after a lag. Its response explains the effect through settlement-date valuation: a short bond may appear to have a larger liability when its dirty price includes accrued interest up to a later settlement date, while the cash proceeds accrue repo interest over the same period.
The example compares cash and bond values at their settlement date. When the cash is grown at the repo rate to that date, it offsets the apparent difference in the bond liability, so correctly discounting cash flows and aligning bond prices with settlement dates should remove the recurring up-and-down P&L. The note addresses the combined settlement and financing logic, but does not give detailed accounting rules for coupon accrual or prescribe a particular system configuration.
Key ideas
- Bond and cash values should be compared on consistent settlement dates.
- A short bond liability can appear larger when its dirty price reflects a later settlement date.
- Repo interest on the cash proceeds can offset that settlement-date effect.
- The response attributes recurring daily P&L swings to inconsistent valuation timing.
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# Repo Accounting for financing accruals # Repo Accounting for financing accruals I have a question on EUROZONE Bonds and in particular repo accrual and bond accrual. On a Thursday if we are Short EUROZONE bonds (which have a T+2 settlement lag) in a portfolio (and assuming no move in yields), there is an exaggeration in pull 2 par and hence the P&L on a Thursday will be a lot lower than on any other given day (assume short bonds and bonds trading at a discount to par). I have a Trader who is experiencing this - his Thursdays are always worse because of this phenomena. Now what about Bond Accruals and Rep financing accruals. I would assume the Bond Coupon Accrual would also have an extra 2 days worth of accrual on a Thursday for EUR Bonds - Is that correct? And For Repos - is that still the case? Our PM feels the reverse repos should have the extra 2 days worth of positive financing on a Thursday to offset the pull 2 par to a degree - but the system accrues the extra 2 days on a Friday - This up / down between days increases vol and dampens his Sharpe Ratio! Does anyone have any thoughts on this and what it would be in the real world / how to treat from an accounting point of view? Thanks so much! VS ## Answer by Attack68 (score 1) https://quant.stackexchange.com/a/76999 Yes your trader is right. Of course you cannot lose money on a Thursday and get it back on a Friday everyweek. Consider being short a bond and long of cash on a Monday (with bond settlement on Wednesday). You might have 100mm Eur in cash as of Monday and the bond dirty price is 100.025. You might suggest that this means the trader's portfolio is negatively valued because he needs 100.025mm Eur to close the bond on settlement on Wednesday. But by Wednesday that 100mm in EUR will grow (through repo interest at 5%) to be equal to 100.025mm so the value of the portfolio is actually NPV'ed to the present day to zero. Similarly if it is a Thursday and the bond settles on Monday then the price might be 100.05 and thus it optically appears the portfolio has even lower value. But now the cash will accrue repo interest for 4 days until Monday at 5% and grow to 100.05mm thus the portfolios value is again zero. If you discount every cashflow correctly and assign bond prices to the days they are due to settle this up and down pnl will not occur.
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