Why does Bund Carry switch on every roll? #607
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Hi Rob, I've been investigating Carry on the Bund, to better understand the P&L for that combination of Trading Rule & Instrument: On every roll, Carry & Price switch around. This means the unsmoothed forecast keeps alternating between almost +-20, and the smoothed forecast zigzags between those values. Why does this happen for the Bund? I don't see this in WTI mini, where the Diff between Price and Carry has much more occasional random spikes. Sorry if this has been covered before. Data taken from PST's Multiple Prices csv, using the last available price on each date, where both Price and Carry have a value. I've pasted in the graphs as pictures from Excel as I was fighting too much with Google Sheets to get what I wanted. Regards, |
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Replies: 3 comments 3 replies
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Discussed in my new book. Excerpt: Footnote for bond nerds: What is going on here? Do people like to buy bunds as presents for their relatives at Christmas and for German unity day (on the 3rd October, in case you wondered). The real explanation is that every 6 months the German government issues a new batch of bunds, which then become the ‘cheapest to deliver’ (CTD) (as yields are very low the new bonds with the longest maturity become the new CTD). |
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There are similar patterns in 5-year German bonds (Bobls), and Spanish 10-year bonds (Bonos). |
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It's good to get an explanation behind the behaviour, and that it is only certain instruments that it impacts. Another Chart: Price and Carry Price vs Forecasts (Smoothed and unsmoothed) With Carry smoothing switched on , the Carry Forecast is heavily influenced by the previous quarter, where the signal has the opposite value. This will dwarf any signal from "actual" carry. With smoothing off, the Forecast will suddenly switch between +-20. I'm not clear why the value is always at the max. With Carry weighted at 50%, this has a big impact on trading for the Bund. |
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You can wait for the book or if it bothers you turn carry off for bunds. I won't judge you. |
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Yeah - I had switched it off for bunds. You've often said that a lot of your profits come from Carry, so I wasn't comfortable with it switched off, particularly as I only currently trade 5 instruments. I had also reduced the weighting of Carry for other instruments, as I had assumed that what I had seen in the data for the Bund Carry might be similar elsewhere. |
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Hi dr1ver1, I have looked into this and other similar phenomena in various assets' term structures as we move through time. There is not much clarity about this online, probably because explanations require deep product knowledge. It seems clear to me that it is important to understand so that you can see whether various approaches to deploying the carry trade make sense. If you see this message and inerestesd in discussing it in more depth, let me know and we can figure out how to get in touch. It would be good get ahead of the curve (pun mildly intended) before the next book! Or if Rob is feeling generous, perhaps we could see about a smidgen of a preview now! All the best all! |
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Discussed in my new book. Excerpt:
Footnote for bond nerds: What is going on here? Do people like to buy bunds as presents for their relatives at Christmas and for German unity day (on the 3rd October, in case you wondered). The real explanation is that every 6 months the German government issues a new batch of bunds, which then become the ‘cheapest to deliver’ (CTD) (as yields are very low the new bonds with the longest maturity become the new CTD).