RBC Weigh In On Rolls & Basis Matters

RBC note that “sizeable RBA holdings and flat net issuance have kept bond basis expensive since QE ended in early 2022. While we expect richness to keep fading, the process will likely continue in glacial fashion with a number of speedbumps on the way.”

• “We think bond basis could trade slightly cheaper over the life of the June contract given the underlying physical baskets are larger, but as free float shrinks again in the Sep contract (via bonds dropping out) we could well see basis tighten up again later.”
• “Returns available on investing cash in 10-Year baskets positions appear reasonable compared to alternative short-dated risk-free assets, but remain much lower than those available in the past. This is reflected in client usage of repo/reverse-repo, which has flipped back from net shorts in physical AGS to net longs, but remains subdued relative to pre-QE levels.”
• “On the upcoming March roll itself: optical effects are small despite compositional changes thanks to flat curves, and rolls are roughly where we’d expect them to be, but directionality is something to watch out for. For instance, we estimate a 3.6bp move higher (lower) in 3-Year yields moves the roll 1bp up (down).”
• “Looking ahead to the Sep basket (i.e. the June roll), the Nov-25s, Nov-27s and May-32s all drop out of baskets and yet are currently all looking a bit rich. There might be some value in opening micro-RV shorts against them well ahead of the June roll.”