Frequently Asked Questions
How does this opportunity arise during the course of a single day?
These opportunities happen for many different reasons; that’s what makes this so unique. An opportunity might arise because a bank or insurance company in Japan had to hedge a large treasury portfolio, or a fund manager in Europe needs to hedge an international bond auction or
new supply of corporates. The best part is ALL these transactions take place in US Treasury futures and happen on our home field of the CBOT.
Are spreads inherently less risky than outrights?
Absolutely, especially the multi-leg spreads (3-6 legs) because they will minimize both directional risk as well as the risks of steepening or flattening of the yield curve.
Why trade futures instead of cash Treasurys?
The inherent implied leverage of a futures contract makes this a strategy that can be excelled at with a reasonably low amount of capital, the margin amount. The futures markets often offer more reliable execution and lower costs than the cash market. There are many strategies that include cash treasuries but we stick with our time-tested lucrative strategy.
Is the margin requirement for spreads less than outright positions?
Margin requirements are definitely lower on spreads. Your exact margin will depend on the clearing firm you choose.
How do you handle major market announcements, like changes to Fed policy or major numbers like unemployment?
We try to be completely flat for all KNOWN major announcement and potential news-based outsized moves. Inevitably the market gets hit with unexpected volatility but being “spread flat” will definitely reduce your exposure.
How much are spreads influenced by market direction?
Generally not at all. Remember, we’re interested in the value of different maturities RELATIVE to one another, not the general direction of the market for all interest rate products. They’ll usually move in tandem when the market moves directionally, BUT on outsized intraday moves, there are some spreads that will more consistently act a certain way. That’s when we act.
Why is now an opportune time to do this?
The pandemic has created the need for record issuance of US Treasury securities. What will be the extent of the Fed’s intervention in Treasury markets? Will there be a partial return to quantitative easing? What will be the duration of each stage of government borrowing? Will the average maturity change? More options create more opinions and ultimately more people playing in our game where we have the edge. Technology allows us to use an algorithm to handle all execution, thus eliminating the inevitable human errors that plague any execution-intense strategy.