CBA On The Futures Rolls

CBA note that "the 3-Year and 10-Year futures are both changing bonds in this roll. In the 3-Year, the Apr '24 is being dropped and not replaced. In the 10-Year, the Nov '32 is being added, with no bond dropped. In both cases, this is causing a large positive value for the roll, since the bond baskets are effectively longer in maturity. On our calculations, the fair value for the 3-Year roll is +13.5bp and the fair value for the 10-Year is +5.1bp."

• "However, there is a second effect in the 3-Year basket that might change the behaviour of the 3-Year futures to physicals basis. Before COVID changed everything, there had been an over‑supply of physical bonds for most of the past five years, meaning that physical bonds were cheap compared to futures. During the mid‑part of 2020 things went haywire for a bit, then once the RBA bond buying really kicked in during late 2020, the physical bonds became hard to source and were expensive compared to the futures. Despite the RBA taper, that situation largely continues overall."
• "However, the bonds underlying the futures contract are changing. In particular, the Apr '24 is no longer part of the futures basket. The Apr '24 was the bond targeted by the RBA in YCC and the bond which has behaved most poorly (from a liquidity perspective) in the last few months."
• "As the Apr '24 leaves the basket the overall liquidity of the basket should improve. However, while the Apr '24 is the worst offender, the RBA continues to buy bonds in the background for BPP (which doesn't include the Apr '24) and hasn't bought bonds for YCT in a long while. As a result, the Apr '24 is still the bond which the RBA buying has affected most severely - but other bonds are catching up."
• "Removing the Apr '24 from the futures basket will improve some of the worst aspects of illiquidity from the futures, but it will not solve the problem entirely. For example, the most recent repo price list we have seen shows every bond out to the Apr '27 as special on repo."