Why Bond Futures Calendar Spreads Reflect Repo Exposure

Summary

A calendar spread between two bond futures can carry repo exposure even when both contracts have the same cheapest-to-deliver bond. The key mechanism is that contracts with different delivery dates respond differently to financing rates: the later contract has greater repo sensitivity than the nearer contract. A change in repo rates can therefore move the two futures by different amounts and alter their spread.

The answer illustrates this with a historical example involving March and June U.S. Treasury futures. A parallel increase in repo rates was associated with a larger price rise in the June contract, causing the long-June, short-March spread to narrow. With CTD switching set aside, the spread is described as being driven mainly by repo changes and by relative richness or cheapness between contracts. The example gives a directional illustration, not a universal calibration; sensitivity depends on the contracts and prevailing market conditions, and the explanation assumes the CTD remains unchanged.

Key ideas

• Different delivery dates give bond futures contracts different sensitivities to repo rates.
• A calendar spread can change when repo rates move, even if both contracts share the same CTD.
• The later-dated contract has greater repo exposure in the example discussed.
• With CTD switching excluded, repo moves and relative contract valuation are key spread drivers.
• Historical tick sensitivities illustrate the mechanism but do not establish a fixed relationship.

Tags

# If March contract and June contract has the same CTD, how is it a repo trade?


# If March contract and June contract has the same CTD, how is it a repo trade?












If the March bond future and the June bond future have the same CTD [cheapest to deliver bond] I am a little unclear on why people say that the calendar spread (long June short March) is a repo trade. Is it equivalent to selling the bond now and buying it forward?

## Answer by Helin (score 3, accepted)

https://quant.stackexchange.com/a/38613

The front and back contracts have different repo sensitivities – longer dated contracts have more repo exposures. To give you a concrete example, on the price date of March 2, 2018, if repo rates rise by 10 basis points, the price of USM2018 would rise by ~1.5 ticks, while the price of the longer dated USU2018 would rise by ~2.6 ticks. So if the repo curve rises in a parallel fashion by 10 bp, the USM8/U8 calendar spread would narrow by ~1.1 tick.

Since CTD switching is not a consideration, the calendar spread is mostly driven by repo and relative contract richness/cheapness, and you can use the numbers quoted above to think about how the spread may change when the repo curve goes up, goes down, and changes shape.

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.