New hazard for U.S. Treasuries hides in bond futures’ fine print

Skip to Content News Archives Economy Energy Oil & Gas Renewables Electric Vehicles Mining Commodities Agriculture Real Estate Mortgages Mortgage Rates Finance Banking Insurance Fintech Cryptocurrency Work Wealth Smart Money Wealth Management Investor Personal Finance Family Finance Retirement Taxes High Net Worth FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials More Innovation Information Technology FP500 Podcasts Small Business Lives Told Tails Told Shopping Financial Post Store Obituaries Place a Notice Advertising Advertising With Us Advertising Solutions Postmedia Ad Manager Sponsorship Requests Classifieds Place a Classifieds ad Working Profile Settings My Subscriptions My Offers Newsletters Customer Service FAQ News Economy Energy Mining Real Estate Finance Work Wealth Investor FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials This advertisement has not loaded yet, but your article continues below.HomeEconomyNew hazard for U.S. Treasuries hides in bond futures’ fine printRecent positioning data suggests that investors are already starting to make the necessary adjustmentsAuthor of the article:Last updated 5 minutes ago On Monday, 30-year U.S. bond yields climbed to 5.68 per cent, near their recent highs and in a range not seen since 2002. Photo by Samuel Corum/BloombergLook to the fine print of Treasury futures for the next big jump in bond yields.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountAs United States 30-year securities head ever closer toward six per cent, the move threatens a shakeup in futures, which are widely used by investors to hedge government bond positions, and by leveraged funds in strategies such as the popular “basis trade.”It has to do with the mechanics. U.S. bond futures are exchange-traded agreements to buy or sell Treasuries at a set price and date. They’re governed by contract terms that dictate what type of underlying securities are allowed to be delivered by traders with short positions to those with long positions, and several typically qualify. Traders then identify the one that’s cheapest to deliver, or “CTD,” and the price of the futures contract tracks it.This advertisement has not loaded yet, but your article continues below.When yields rise rapidly, as is happening now, the pricing dynamics of the deliverable basket of securities are altered, and the CTD starts to migrate toward a longer-maturity bond. This forces asset managers to adjust to this so-called duration shift, or “CTD switch,” by selling Treasury futures, which in turn “could exacerbate the rise in long-end yields” in the cash market, according to a recent note by strategists at BNP, including Guneet Dhingra, Sebastian Mauleon and Vincent Zhou.SUBSCRIBER EXCLUSIVE: FP West: Energy Insider brings you behind the oilpatch’s closed doors with exclusive insights from insiders every Wednesday morning.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of FP West: Energy Insider will soon be in your inbox.We encountered an issue signing you up. Please try againTo maintain a stable duration target in a portfolio as the CTD shifts toward longer-duration bonds, long futures positions would need to be sold while short positions would need to be bought back. Depending on how these dynamics interact and at what times, this can cause spillover effects in the underlying bonds.Focus is on the longer maturities, notably the long-bond contract where the current CTD security is the 2.5 per cent February 2045 bond. A Bloomberg scenario analysis shows that a 30-year yield rise to near six per cent could result in a CTD shift to a 2050 maturity.On Monday, 30-year yields climbed to 5.68 per cent, near their recent highs and in a range not seen since 2002.This advertisement has not loaded yet, but your article continues below.Recent positioning data suggests that investors are already starting to make these adjustments. Asset managers have been reducing net long positions in the long-bond and ultra-long bond futures in recent weeks, a time when 30-year yields moved sharply higher past 5.6 per cent. For Goldman Sachs Group Inc. strategists including George Cole and William Marshall, the drop in long futures positions is likely a sign of “active management of the duration extension risk associated with potential Treasury futures CTD switches,” according to a recent note.The latest data from the Commodity Futures Trading Commission showed aggressive selling of ultra-long bond contracts. In the week up to Sept. 29, when 30-year yields rose from 5.28 per cent to as high as 5.62 per cent, asset managers cut their net long in ultra-long futures positioning by almost 100,000 contracts — an amount equivalent to US$15 million per basis point in risk, or US$11 billion’s worth of the current 30-year cash bond. A more subtle positioning shift in the long-bond contracts over the same period signals that the CTD switch risk and associated forced selling is still live for that tenor.“The ultra-long bond has already shifted to the higher duration CTD but the long-bond futures still has upside risk to duration extension,” said Monty Gandhi, a rates strategist at SMBC.We apologize, but this video has failed to load.This advertisement has not loaded yet.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.