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Risk Of A Buxl CtD Switch?

BUNDS

Sell-side names look at Buxl CtD switch risk:

  • Citi: A CTD shift to a higher duration Buxl (Aug53s in this case) would mechanically lead to an increase in duration of Buxl contracts and perhaps force long investors to reduce their exposure by entering offsetting short positions. Our calculations show that a ~20bp parallel sell-off across the deliverable basket will result in a CTD switch to Aug53s, though this can quickly change as evidenced in yesterday’s rally.
  • Commerzbank: The brutal sell-off in ultra-longs is reviving switch risk for the Dec Buxl contract; a ~25bp yield increase would turn the DBR Aug53 into the cheapest-to-deliver bond (note that the roll vs. the Aug48 has been comparatively stable during the sell-off, and the two bonds trade on virtually equal levels in repo). Accordingly, the UB net basis has spiked since Thursday, but compared to the Dec22 contract (the last time when switch risk was for real), it hardly appears excessive for the current stage of the contract cycle which suggests further upside.
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Sell-side names look at Buxl CtD switch risk:

  • Citi: A CTD shift to a higher duration Buxl (Aug53s in this case) would mechanically lead to an increase in duration of Buxl contracts and perhaps force long investors to reduce their exposure by entering offsetting short positions. Our calculations show that a ~20bp parallel sell-off across the deliverable basket will result in a CTD switch to Aug53s, though this can quickly change as evidenced in yesterday’s rally.
  • Commerzbank: The brutal sell-off in ultra-longs is reviving switch risk for the Dec Buxl contract; a ~25bp yield increase would turn the DBR Aug53 into the cheapest-to-deliver bond (note that the roll vs. the Aug48 has been comparatively stable during the sell-off, and the two bonds trade on virtually equal levels in repo). Accordingly, the UB net basis has spiked since Thursday, but compared to the Dec22 contract (the last time when switch risk was for real), it hardly appears excessive for the current stage of the contract cycle which suggests further upside.