Generating Alpha – Eurex Fixed Income Futures Calendar Rolls

27 February 2019

Introduction

Eurex’s globally unique suite of Fixed Income Futures contracts gives the Buy Side and Sell Side a very efficient leveraged liquid access to European Government Bond Market Beta [1] and provides a number of opportunities to generate alpha vis-à-vis relative value strategies [2]. Trading Eurex Fixed Income Futures Calendar Rolls is another opportunity to generate alpha and extremely important for the Buy Side in maintaining Beta positions in Eurex Fixed Income Futures when rolling positions from the front month as delivery approaches [3].

Diagram 1 is the RiskVal Calendar Analysis screen for the Eurex March / June Bund Futures which looks at estimating the fair value of the Calendar Roll in terms of the CTD implied repo rates, and the forward repo implied between these rates. At the time of writing with repo rates of -0.627% to the March delivery date and -0.676% to the June delivery date suggest an Implied Forward Repo from March to June of -0.682%. Compare to the market quoted forward repo of -0.611% (which traders can customize) puts the fair value around 2.53.

However, there are other factors to consider when analysing a Eurex Bond Futures fair value calendar roll, likely cheapest/richest and possible trend:

• Differences in Cheapest to Deliver (CTD) for the front and back delivery months – in the March / June Bund Futures calendar roll the DBR 0.5% February 2028 is the CTD into March ’19 delivery and June ’19 delivery. However, where there is a difference in CTD in determining a fair value for the calendar roll account has to be taken of the two CTDs and their spread and any future movement in the roll will be affected in changes in the yield spread between the two CTDs.

• Significant Differences in Duration between CTDs – where there is a significant difference in the duration of the two CTDs any significant change in rates will cause changes in the calendar roll e.g. with a longer duration CTD in the further delivery month, a rise in rates will cause the calendar roll to widen.

• Anticipated new bond issues – where there is anticipated a new bond issue that is expected to meet the requirements of being a deliverable issue into and based on where the bond is likely to be issued and become the new CTD, account has to be taken into consideration in determining the fair value of a Eurex Bond Futures calendar roll of the new bond issue becoming CTD. For example, the upcoming BKO March issue is likely to be the CTD for Euro-Schatz June 19. Ignoring this new issue and using the existing OBL 0% 21 will overvalue the M9 contract duration.

• Closeness of deliverable bonds becoming CTD – where several bonds are extremely close in becoming CTD there will be an ‘optionality’ factor in the pricing of the fair value of a Eurex Bond Futures calendar roll to account for the possibility of a switch in CTD.

• Relative Value – Taking the above factors into consideration allows practitioners to then analyse whether the Calendar Roll is trading rich or cheap relative to the Forward EURIBOR or EONIA curve shape. As shown in the RiskVal screen below, a spot versus forward Z-Spread analysis is the preferred method to track Relative Value performance. RiskVal calculates the Forward Z-Spread of each CTD to the M9 date and compares the Forward Spread of Spread to the spot market. The Theoretical B/E Calendar Roll is where the forward curve aligns with the spot curve.


Important to note, the Forward Repo from H9 to M9 on the Front CTD affects this analysis. Traders can estimate the Forward Repo from the EONIA curve or request the rate from a repo desk.

Conclusion

Eurex’s unique suite of Fixed Income Futures give the Buy Side and Sell Side a liquid leveraged access to European Government Bond Market Beta. Rolling those Beta positions from the front delivery month as delivery approaches at the most optimum spread level is extremely important. While implied repo rates for the CTDs to the futures delivery dates can give an indication of where the fair value of the Eurex Fixed Income Futures calendar roll is likely to be, it does not give the full picture of the fair value of the calendar roll and where it is likely to trend. In fact, trading Eurex Fixed Income Futures Calendar Rolls, taking into consideration all the factors that can make a spread trading cheap or rich to fair value be a relative value trade and an opportunity to generate alpha.

For further information please contact
• Eurex: Byron Baldwin - LinkedIn – www.eurexchange.com
• RiskVal: Peter Peteronzio – LinkedIn – www.riskval.com

Footnotes & Further Reading
Eurex Fixed Income Futures: https://www.eurexchange.com/exchange-en/products/int/fix
[1] ‘The Future of Fixed Income Investing in a Capital Constrained World – Efficient Access to Government Bond Market Beta and Generating Alpha’: https://www.linkedin.com/pulse/future-fixed-income-investing-capital-constrained-world-byron-baldwin/
[2] ‘Generating Alpha in European Fixed Income – Relative Value / Duration Neutral Strategies with Eurex Fixed Income Futures’: https://www.linkedin.com/pulse/generating-alpha-european-fixed-income-relative-value-byron-baldwin/
[3] Eurex Fixed Income Futures are unique to other Bond Futures traded globally in that Eurex Bond Futures only have one delivery day for each delivery month. The delivery day for all Eurex Fixed Income Futures is the tenth calendar day of the respective quarterly delivery month; otherwise, it is the exchange day immediately succeeding that day. For the March ’19 delivery month it is 11th March 2019 and for the June ’19 delivery month it is 10th June2019.

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