CBA: Roll Against A Backdrop Of Volatility And Steep Curves

Looking to futures roll dynamics, CBA note that “with repo rates still clearly negative and bond yields high, the effective forward rate in the June baskets is much higher than the near spot rate in the March baskets. This applies to both 3-Year and 10-Year futures.“

• “The fair value for the 3-Year roll is very high at +19.4bp. There has been a change in the bonds, the Apr‑26 is added to the basket. However, that change in bonds is only adding 4.3bp to the roll. The vast bulk of that roll pricing is the steepness of the slope at present, which is adding 15.1bp.”
• “For the 10-Year, the effect of the forward start is reduced because the 3-month forward start is a smaller part of the overall maturity. But the 10-Year futures roll still has a fair implied price of 6.4bp. There is no change of bonds in the 10-Year futures, it’s all about the forward rate effect.”
• “Both the 3- and 10-Year front contracts are sitting relatively near fair value. That means that there is unlikely to be a major effect from the front contract moving back to zero by the time of the roll.”