By Steve Matthews April 7 (Bloomberg) -- Federal Reserve Bank of Kansas City President Thomas Hoenig said the central bank should consider starting to raise its key interest rate sometime soon to about 1 percent to prevent asset bubbles from emerging. I would view a move to 1 percent as simply a continuation of our strategy to remove measures that were originally implemented in response to the intensification of the financial crisis that erupted in the fall of 2008 he said today in the text of a speech in Sante Fe, New Mexico.
10yr treasury auction (actually a re-opening) went very well. The auction priced 3+ bps through the 1PM bid, high bid to cover ratio (maybe highest ever) and treasuries continue to rally post auction.
Hung parliament possibility will keep a lid on GBP long enough for credit-rating downgrade concerns to resurface taking GBP down to 1.45 or below. Expect it to stay fairly range-bound between mid 1.53s and double bottom until then.
I wouldn't use the term backwardation towards interest rate futures as ultimately the futures reference the (forward) yield curve. But in your example, let's say I compare the June 10yr futures trading at 115-13 today to the September 10yr futures trading at 113-31. Why is there a decrease in price? One main reason is that the Sep 10yr future is referencing the 3% of 2/17 US Treasury as the cheapest to deliver (this is trading at 97-21) while the Sep 10yr future is referencing the 4.75% of 8/17 as its cheapest to deliver (this is trading around a price of 108-17). The cheapest-to-deliver treasury in Sept is more expensive than it is in June.
I think the issue in your analysis is the misplacement of the relationship between yield and price because you are observing the yield on one treasury and assuming that the futures price moves respective of that treasury when in fact the futures is referencing an entirely different treasury than the one whose yield you are observing. All that is included in the price of a future is the following:
(note that CTD = Cheapest-to-deliver treasury that will meet the delivery stipulations of the futures contract)
(CTD Price - CTD Carry - Option) / CTD Factor
The basis net of carry is the option value, or theoretical option value.
If the basis net of carry is cheap, then the futures are rich. If the basis net of carry is rich, then the futures are cheap. Any disparities will be quickly arbed out by the market and its participants.
You cannot compare the yield on the current 10yr treasury (the cash treasury, the 3.625% 2/20) to the 10 year futures contract. There is a difference between cash treasuries and treasury futures. Futures are short an option which is based on the cheapest-to-delivery treasury out of the available basket of deliverable treasuries. When you go long a future, you are short an option because the other party that is short the future to you has an option on which cash treasury to eventually deliver into your contract if you don't close out (this is how it is settled, similar to how barrells of oil will be delivered if you hold crude futures to settlement). The current cash treasury that the 10 year futures considers to be the cheapest-to-deliver is the 3% of 2/17, not the current 3.625% of 2/20 that you are making the price/yield comparison to. So you are comparing the yield on the 3.625% 2/20 to the futures contract that is referencing a different 10 year treasury (the 3% of 2/17) in that basket of available treasuries to be delivered.
Add to this additional distortions that can result due to the futures contract being too cheap or too rich to the cash treasury it is referencing as the cheapest-to-deliver (i.e. may be rich since requires less cash outlay than the cash treasury, etc.).
Thought the minutes were clearly dovish, emphasized by "some members" stating that they saw greater risk is tightening too early than too late. The talk about mid-term inflation possibly being a risk seemed more like rhetoric thrown out there to placate hawks.
Try publishing this in the UK weekend papers: Traders bet BankofEngland will raise rates to 6.25% --highest since 1… https://t.co/GWXrTEAk4R(1 year ago)
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ما وراء هبوط الدولار مع الذهب و من منهما يتمكن الارتداد؟
موعدنا الآن في غرفة شركة إكس أم لجلسة الأسواق
https://t.co/Y7tD0RxCS2
@XM_COM (1 year ago)
Jobless claims > 300k before next FOMC meeting would be ideal for Fed to make up for any CPI upside surprise (1 year ago)
"Cook & Eat at Home" scheme may come next to defeat UK inflation... (1 year ago)
Earlier in the week gold selloff was attributed to smaller than exp China EASING. Metal is now holding v well despi… https://t.co/ZW9cmXTPWW(1 year ago)
1Y 7.24
2Y 7.21
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4Y 7.64
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6Y 7.33
7Y 7.38
8Y 7.30
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10Y 7.35
15Y 7.22
April 7 (Bloomberg) -- Federal Reserve Bank of Kansas City
President Thomas Hoenig said the central bank should consider
starting to raise its key interest rate sometime soon to
about 1 percent to prevent asset bubbles from emerging.
I would view a move to 1 percent as simply a continuation
of our strategy to remove measures that were originally
implemented in response to the intensification of the financial
crisis that erupted in the fall of 2008 he said today in the
text of a speech in Sante Fe, New Mexico.
(note that CTD = Cheapest-to-deliver treasury that will meet the delivery stipulations of the futures contract)
(CTD Price - CTD Carry - Option) / CTD Factor
The basis net of carry is the option value, or theoretical option value.
If the basis net of carry is cheap, then the futures are rich. If the basis net of carry is rich, then the futures are cheap. Any disparities will be quickly arbed out by the market and its participants.
Add to this additional distortions that can result due to the futures contract being too cheap or too rich to the cash treasury it is referencing as the cheapest-to-deliver (i.e. may be rich since requires less cash outlay than the cash treasury, etc.).
Just a hint.