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Using Treasury STRIPS and Coupon Bonds for Relative-Value Models

Article Quant Q&A · Author: Bazman
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Summary

The document considers the data needed for a Dynamic Nelson-Siegel relative-value model, with emphasis on whether zero-coupon rates reflect traded instruments or are interpolated. For US Treasuries, coupon and principal STRIPS are identified as traded zero-coupon securities that can be accessed through Bloomberg security groups. The response cautions that many STRIPS are not very liquid and may trade differently from coupon bonds, so zero rates are not necessarily the best direct inputs for a relative-value model.

The suggested approach is to fit the model directly to coupon Treasuries or par swaps, using selected liquid maturities as anchors, then evaluate STRIPS relative to the fitted curve. The answer points to a fixed-income text for practical examples. It does not identify a Bloomberg page that labels every zero rate as observed or interpolated, and it offers no data-quality comparison or empirical test of the proposed modeling choice.

Key ideas

  • US Treasury STRIPS are traded zero-coupon securities, including coupon and principal strips.
  • STRIPS can be illiquid and may behave differently from coupon Treasuries.
  • A relative-value curve can be fitted directly to coupon bonds or par swaps at liquid maturities.
  • STRIPS can then be compared with the curve fitted to coupon instruments.
  • The document does not give a Bloomberg page that distinguishes observed rates from interpolated ones.

Tags

Fixed incomePortfolio constructionStatistics
Full text
# Bloomberg Zero Coupon Rates


# Bloomberg Zero Coupon Rates












As some of your may know from my other posts, I am working on a Dynamic Nelson Siegel (DNS) based relative value trading model. On simulated data (which satisfies all the assumptions) of the DNS it worked well (unsurprisingly).

However I now need to get real data/results.

Part of the logic of the model is to look at the relative value of the most liquid points say 2,5,10y relative to all the remaining points.

So it's important that the zero coupon data represents ideally traded or at least traceable rates for all tenors rather than stale rates or even interpolated rates (as in this case I am just comparing different interpolation schemes!).

Does anyone know of a Bloomberg page that offers such rates? Or at least makes a distinction between which rates are real and which are interpolated?

Thanks Baz

## Answer by Helin (score 4, accepted)

https://quant.stackexchange.com/a/12761

For the US Treasury market, zero coupon bonds are traded and they are called STRIPS. You can access them through "S GOVT" (coupon Strips) or "SP GOVT" (principal strips) on BBG.

With regard to relative value trading, it's actually pretty rare that we fit models to zeros, because a lot of them are not liquid and trade differently from their coupon counterparts.

Instead, what you should do is to fit your model to coupon bonds or par swaps directly. Like you said, you could potentially fit the 2y, 10y, and 30y bonds, then look at relative value elsewhere. Once you have fit a model to coupon Treasuries, you can then assess STRIPS against this same model.

For some real life examples, Tuckman's Fixed Income Securities (3rd Edition) Chapter 11 is quite good.

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.