Treasury Futures Roll Returns, Carry, and Reasons to Hold Long
Summary
The document examines negative carry claims for long positions in short-maturity Treasury note futures, including the two-year contract. It distinguishes cash bond carry from futures roll return: futures themselves do not have carry in the same sense as financed cash positions, while the shape of the futures term structure determines the return from rolling exposure. A downward-sloping yield curve can also produce negative rolldown for a cash Treasury position.
The answers say that an unchanged market can imply losses from negative futures roll and yield curve rolldown, but this does not alone determine whether a long position is attractive. A trader may expect rates to fall enough to offset those losses, use the contract as a recession hedge, pair it with a longer-maturity short position, or hedge a swap exposure. The discussion is qualitative and reflects the curve conditions described at the time; it does not establish expected returns for other dates or strategies.
Key ideas
- Carry on financed cash bonds and roll return on futures are distinct concepts.
- The futures term structure influences the return from rolling a futures position.
- Yield curve slope can create positive or negative rolldown for cash bond positions.
- Long futures exposure may serve directional, relative-value, or hedging purposes despite negative roll.
Tags
Full text
# Why are long 2 year Treasury futures (ZT) trading at negative carry? # Why are long 2 year Treasury futures (ZT) trading at negative carry? The 2 year Treasury note yields ~4.9% in the cash market as of 29 Aug 2023. Assume implied cost of financing of 5.5% pa (3 month T-bill rate) to finance a long futures position. This results in a negative carry of ~0.6% pa if the world does not change. The 3 and 5 year Treasury note futures also have a negative carry based on the same reasoning. And they have a negative roll down return since the yield curve is presently downward sloping from 2 year tenor to 10 year tenor. Have I understood correctly that anyone who holds a long 2 year Treasury note futures position suffers a negative carry and will lose money if the world does not change? (same applies for long 3 and 5 year Treasury notes) Meaning to say, the carry, expected return as well as actual P/L are all negative if the world does not change. If yes, how is it possible, from an expected returns perspective, that there are still longs in this market? (aside from speculators who are hoping rates will fall) Thanks in advance and apologies for ignorance. ## Answer by user68819 (score 3) https://quant.stackexchange.com/a/76581 That's like saying, when the curve is upward sloping, why is anyone ever short ? Also, futures don't have carry, only roll down by definition. Carry pnls for cash are realised if fwds are realised - so if the fwds are realised at term, yes these long cash positions should lose money. Roll down is for an unchanged spot curve. ## Answer by craftcase (score 1) https://quant.stackexchange.com/a/76601 As mentioned by @user68819, the correct terminology for returns from rolling down the futures term structure futures is roll return and not carry. The points below are a summary of @user68819's comments. Posting them in the form of an answer for easy reference. Currently, the term structure for 2 year T-note futures (ZT) is upward sloping, indicating a negative roll return and also negative P/L assuming the world remains unchanged. One to two years ago, it was downward sloping, the opposite. Despite the negative futures roll return (and negative rolldown return from the downward sloping Treasuries yield curve at present), there are still good reasons for longs to hold ZT. - An outright long may expect rates to fall (as the dot plot currently suggests). And capital appreciation > the loss from futures roll + loss from rolldown yield curve. All this whilst providing a hedging service to the portfolio against a recession. - One could be long ZT and short another longer tenor bond as part of a long-short position (with positive carry). - As a hedge against some swap position that is concurrently held.
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.