Bond futures backwardation
Why Zacks? Learn to Be a Better Investor. Forgot Password. A physically settled commodity futures contract obligates the buyer to take delivery of a set quantity and quality of a commodity at a future date.
Deep backwardation in T-Bonds?
Discussion in ' Financial Futures ' started by crgarcia , Jul 16, Log in or Sign up. Elite Trader. Deep backwardation in T-Bonds? If you try to hedge log bonds with a short future, backwardation even completely erases all interests to be received by holding T-Bonds. I know this suggest a lack of demand for all the Bonds being issued. Short a calendar spread?
It's all about the slope of the curve and the rolldown. Also, you have to be a bit more specific about what you're buying and what you're using to hedge. Martinghoul, you mentioned those terms are not used in relation to bonds, is that to say that barkwardation is not a reliable indicator of anything as may be read into other commodities?
A professional trader could "borrow cheaply" at the short-term rate, then buy bonds with the loan, short-hedge the bonds with defered bond futures contracts, and then collect bond interest payments at the long-term rate, i. The market won't let that happen for very long. Actually, if all you're referring to is the spread between U9, Z9, H10 etc contracts, that really doesn't have much to do with the rates, necessarily. One of the reasons for these positive rolls is just the structure of the deliverable basket.
However, this bond falls out of the Z9 basket and a lower coupon bond 4. So the further out futures are cheaper simply because its CTD trades closer to par. This isn't to say that it's always the only factor. This is currently the case for the long bond futures You must log in or sign up to reply here. Your name or email address: Do you already have an account? No, create an account now. Yes, my password is: Forgot your password?
There are different conditions under which these futures contract trade. One of those conditions is backwardation. But what exactly is it? Futures and spot returns on the same underlying asset often diverge, and the of the futures term structure and to the notions of backwardation and contango. Bonds. Current Yield (Bond Coupon)9. Financing Rate. Currencies. Foreign.
Futures contracts are financial contracts where one party agrees to buy or sell a specific, underlying asset at an agreed upon price at a certain time in the future. These assets vary including commodities and currencies. There are different conditions under which these futures contract trade.
Futures prices will converge to spot prices by the delivery date.
Discussion in ' Financial Futures ' started by crgarcia , Jul 16, Log in or Sign up.
Oil Market Shifts From Contango to Backwardation: Implications for Investors
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What's the Best Way to Play Backwardation in the Futures Market?
Normal backwardation , also sometimes called backwardation , is the market condition wherein the price of a commodities' forward or futures contract is trading below the expected spot price at contract maturity. The opposite market condition to normal backwardation is known as contango. Similarly, in practice the term may refer to "negative basis" where the future price is trading above the expected spot price. A backwardation starts when the difference between the forward price and the spot price is less than the cost of carry when the forward price is less than the spot plus carry , or when there can be no delivery arbitrage because the asset is not currently available for purchase. In a state of backwardation, futures contract prices include compensation for the risk transferred from the underlying asset holder to the purchaser of the futures contract. This means the expected spot price on expiry is higher than the price of the futures contract. Backwardation very seldom arises in money commodities like gold or silver. The term is sometimes applied to forward prices other than those of futures contracts , when analogous price patterns arise.
The shape of the futures curve is important to commodity hedgers and speculators. Both care about whether commodity futures markets are contango markets or normal backwardation markets.
