"We firmly believe that the on-the-run issues should command a high liquidity premium in the current environment. But with very high probability, the.

Slides:

Advertisements

Similar presentations

1 Financing Techniques for Short Sellers Stuart McCrary.

Advertisements

Financial Engineering

By: Brandon Ngiam, Shiyan Gan, Eric Bae, Bo Li, Chad Trice, Tiffany Chen, Sunny Liu, Keonwoo Kim.

Term Structure of Interest Rates. Outline  Meaning of Term Structure of Interest Rates  Significance of Term Structure of Interest Rates  What is Yield.

Intro to Financial Management Financial Markets and Interest Rates.

11-Interest Rate Risk. Review  Interest Rates are determined by supply and demand, are moving all the time, and can be difficult to forecast.  The yield.

Bennie D Waller, Longwood University Personal Finance Bennie Waller Longwood University 201 High Street Farmville, VA.

Interest Rate Swaps and Agreements Chapter 28. Swaps CBs and IBs are major participants  dealers  traders  users regulatory concerns regarding credit.

Treasury bond futures: pricing and applications for hedgers, speculators, and arbitrageurs Galen Burghardt Taifex/Taiwan 7 June 2004.

Fin424 (Ch 5) 1 Risk and Term Structure 1. Factors affecting Yields to Maturity 2. Yield Curve 3. Theoretical Spot Rate Curve 4. Forward Rate 5. Determinants.

Characteristics of Taxable Securities Money Market Investments Highly liquid instruments which mature within one year that are issued by governments and.

Introduction to Debt Markets

An Overview of the Financial System chapter 2. Function of Financial Markets Lenders-Savers (+) Households Firms Government Foreigners Financial Markets.

1 Yield Curves and Rate of Return. 2 Yield Curves Yield Curves  Yield curves measure the level of interest rates across a maturity spectrum (e.g., overnight.

The Term Structure of Interest Rates

INVESTMENTS | BODIE, KANE, MARCUS Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin CHAPTER 15 The Term Structure.

Duration and Yield Changes

06-Liquidity Preference Theory. Expectations Theory Review Given that Expectations Theory: – Given that we want to invest for two years, we should be.

The Valuation of Bonds Minggu 9.

AN INTRODUCTION TO DERIVATIVE SECURITIES

Bond Valuation Economics 71a: Spring 2007 Mayo Chapter 13 Lecture notes 4.4.

Bonds with embedded options

CHAPTER 15 The Term Structure of Interest Rates. Information on expected future short term rates can be implied from the yield curve The yield curve is.

Swaps and Interest Rate Derivatives

Drake DRAKE UNIVERSITY Fin 284 Bonds with embedded options.

Bonds are typically priced “relative” Generally: Lower quality is priced relative to higher quality Lower liquidity is priced relative to higher liquidity.

Our market “risk” Measure Position adjusted sensitivity using 1 basis point change Example of “bond risk”: Price (pv): (that’s a total amount.

Valuing Securities Stocks and Bonds.

Class 5 Option Contracts. Options n A call option is a contract that gives the buyer the right, but not the obligation, to buy the underlying security.

Yield Curves and Term Structure Theory. Yield curve The plot of yield on bonds of the same credit quality and liquidity against maturity is called a yield.

Personal Finance. Make saving a priority in your money routine: First decide how much you can save each month. Each pay period, pay yourself first. Next.

Slide 1 Valuation and Characteristics of Bonds Characteristics of Bonds Valuation Bond Valuation Bond Quotes Duration.

Business F723 Fixed Income Analysis Week 5 Liability Funding and Immunization.

13.1 Introduction to Futures and Options Markets, 3rd Edition © 1997 by John C. Hull Options on Futures Chapter 13.

Chapter 5 Determination of Forward & Future Prices R. Srinivasan.

VALUATION OF BONDS AND SHARES CHAPTER 3. LEARNING OBJECTIVES  Explain the fundamental characteristics of ordinary shares, preference shares and bonds.

Treasury Management Software Reporting Discounts and Premiums CMTA Education Conference Cal Poly, Pomona September 28-30, 2010 Peter Bakonyvari Director.

Chapter 4 Portfolio Management of Bonds Viewing recommendations for Windows: Use the Arial TrueType font and set your screen area to at least 800 by 600.

Yield Curve Analysis.

INVESTMENTS | BODIE, KANE, MARCUS Chapter Fifteen The Term Structure of Interest Rates Copyright © 2014 McGraw-Hill Education. All rights reserved. No.

Introduction to Derivatives

Problem Set 3 Understanding the Yield Curve. Disney Case ¥ Debt Support 2 2 € Debt Support ¥ Debt Support € Debt Support 1 1 ¥ Principal € Principal ¥

Comm W. Suo Slide 1. comm W. Suo Slide 2  Active strategy Trade on interest rate predictions Trade on market inefficiencies  Passive.

Chapter 2 Pricing of Bonds. Time Value of Money (TVM) The price of any security equals the PV of the security’s expected cash flows. So, to price a bond.

Intermediate Investments F3031 Passive v. Active Bond Management Passive – assumes that market prices are fairly set and rather than attempting to beat.

Chapter 17 Futures Options Options, Futures, and Other Derivatives, 8th Edition, Copyright © John C. Hull

1 Bond Portfolio Management Term Structure Yield Curve Expected return versus forward rate Term structure theories Managing bond portfolios Duration Convexity.

0 Forwards, futures swaps and options WORKBOOK By Ramon Rabinovitch.

Yield Curve and Term Structure of Interest Rate. Base rate of interest –US Treasuries are “safer” than any other (US) debt security free of credit risk.

Chapter 6 Treasury Securities Markets. Treasury Securities Backed by full faith and credit of U.S. government Zero default risk Largest volume of any.

Intro to Financial Management Financial Markets and Interest Rates.

SWAPS Types and Valuation. SWAPS Definition A swap is a contract between two parties to deliver one sum of money against another sum of money at periodic.

Index, Currency and Futures Options Finance (Derivative Securities) 312 Tuesday, 24 October 2006 Readings: Chapters 13 & 14.

An Overview of the Financial System chapter 2 1. Function of Financial Markets Lenders-Savers (+) Households Firms Government Foreigners Financial Markets.

© 2012 McGrawHill Ryerson Ltd. Chapter 6 -  A graph of the relationship between time to maturity and yield to maturity, for bonds that differ only in.

Repo rate 1. A Namura security dealer, who just purchased 3-month U.S. treasury security at the government weekly auction at $98.65, finances the purchase.

Comm W. Suo Slide 1. comm W. Suo Slide 2  Active strategy Trade on interest rate predictions Trade on market inefficiencies  Passive.

Bond Price Volatility Chapter 4.

1 Business F723 Fixed Income Analysis. 2 Plain Vanilla Bond Issuer Maturity Date Face Value ($1,000) Coupon Rate (paid 1/2 every six months) Financial.

Financial Risk Management of Insurance Enterprises Review of Bond Pricing.

Quiz 1 – Mythical Man-Month Chapters 1-6. Topics for today Review our market risk measure Review units Negative position amounts – shorting Relative Pricing.

4-1 Introduction Credit is one of the critical mechanisms we have for allocating resources. Although interest has historically been unpopular, this comes.

Relationship among rates on bonds with different characteristics but same maturity. What causes interest rates on bonds with the same maturities to increase?

Assignment tips.

Understanding Policy Measures

Arbitrage in the US Treasury Market?

Interest Rate Risk Chapter 9

Arbitrage in the US Treasury Market?

Economics 434: The Theory of Financial Markets

Intro to Financial Management

Presentation transcript:

"We firmly believe that the on-the-run issues should command a high liquidity premium in the current environment. But with very high probability, the 5 1/2s of 8/15/2028 will NOT be the current bond a month from now. The Bond/Old Bond spread is currently about 13bp. The average of this spread around auction is historically about 3bp. Hence we think that much of the premium now assigned to the current bond should be ultimately passed on to the new issue by the expected auction date. Therefore it makes sense to begin scaling into a reverse roll now, at these levels." Report from US Treasury bond trader to Fixed Income clients, Goldman Sachs, 6th October Arbitrage in the US Treasury Market?

GLOSSARY On-the-run On-the-run: The most recently issued Treasury bond in any given sector (e.g. 10 year sector, 30 year sector) of the yield curve. The Current Bond The Current Bond: the most recently issued 30 year The Bond"). US Treasury bond (also shortened to just "The Bond"). The Old Bond The Old Bond: the second most recent 30 year US Treasury issue. Bond/Old Bond spread Bond/Old Bond spread: the yield difference between the most recent and the previously issued 30year Treasuries. Basis point (bp): Basis point (bp): 1/100 * 1%

The Yield Curve 2/28 5/28 8/28 All of these bonds are in the 30yr "sector" of the yield curve. 3bp Yield Bond Maturity 1yr 5yr10yr30yr Yield NO The yield on the "on-the-run" 30yr bond is lower than similar bonds => it is worth more: Liquidity? WHY? Different Maturity? Better Credit? NO YES!

Properties of the on-the-run Bond Tighter bid-offer spread This Liquidity Premium has historically been worth about 3bp … So why is it worth 13bp today? Why is there an extra 10bp? Could it be Arbitrage? The Goldman Sachs US Treasury bond trader thinks so! Transactions costs are lower for quick and easy buying & selling Worth more (=> lower yield )

The Arbitrage Trade 2/28 5/28 8/28 13bp Yield TODAY Sell the 8/28 (today's "on-the-run" bond) Buy back the 8/28 (today's "old" bond) 2/28 5/28 8/28 11/28 13bp Yield ONE MONTH's TIME Buy the 5/28 (today's "old bond") Net Profit: 13bp (because the on-the-run is 13bp more costly than the old bond). Sell the 5/28 (today's "old old bond") Net cost: zero (now the two bonds cost the same amount; liquidity premium is now on the new "on-the-run" bond)