Mrs. Watanabe - Meet Sovereign Bond Trading; Next Up - 10 Year Bond Circuit Breakers

Tyler Durden's picture

As if insane FX vol (has anyone looked at the EURUSD chart recently) and failed LCH.Clearnet margin hikes to prevent surging vol in Irish and Portuguese bond was not enough, the CME is doing its best to make sure developed world sovereign bonds, which had for the time being been recently stable, follow in the footsteps of all other assets that actually trade (read: not stocks) and see volatility surge (perhaps so the Fed can sell more of it). The CME has just announced it is launching cash-settled Sovereign Yield Spread futures beginning May 22 for a trade date of May 23. What this means simply said, is that after discussions with Dealers, the CME has realized that its biggest clients are all too willing to hedge sovereign risk (pocketing wide bid/ask spreads in the process). It also means that the market for sovereign bonds is about to be opened up to all Mrs Watanabes in the world who are willing to express a direction bias in the 10 Year bonds of France, Germany, Italy, Netherlands, UK and, of course, the US. Now on the surface there is nothing wrong with that, however it does open the Treasury market to two traditional risk factors always seen when an otherwise ration market is opened up to everyone: 1) the herd, which tends to be always wrong, steps in and exacerbates prices moves in either direction and 2) here comes HFT: very soon the spread arbs will be trading the living daylights out of Treasury bonds, which courtesy of market reflexivity, where the derivative actually sets the price of the underlying, means that a bunch of computers will soon be the reason for why 10 Years trade at 0 or 10%. Coming next: circuit breakers in the Treasury market. At least this means that CDS traders will no longer be scapegoated for sovereign insolvency.

From the press release:

London, April 21, 2011 /PRNewswire/ — CME Group, the world’s leading and most diverse derivatives marketplace, has announced today that it will introduce cash-settled Sovereign Yield Spread futures
beginning May 22 for a trade date of May 23. The six countries
represented in the initial launch phase include France (OAT), Germany
(Bund), Italy (BTP), Netherlands (DSL), United Kingdom (Treasury Gilts),
and United States (Treasury Notes). These products are listed by and
subject to the rules of CME, and further diversifies CME Group’s
Interest Rates product portfolio.

“We have had many discussions during the past several months with
asset managers, investment banks and hedge funds about their U.S. and
European government bond portfolio needs, and the message to us was
clear — design a contract that provides capital efficiencies through one
clearing facility that is cost effective and meets the regulatory
requirements,” said Robin Ross, Managing Director, Interest Rate
Products for CME Group. “Our new Sovereign Yield Spread contracts will
be key risk management tools for anyone with exposure to U.S. and
European government bonds and will help facilitate the price and risk
transparency that global central banks desire.”

Key features and benefits of the new contract include the following:

  • Sovereign Yield Spread futures wrap a sovereign
    yield spread exposure into a single futures contract — with no need to
    execute and manage individual legs in cash bond/repo markets or across
    multiple futures exchanges.
  • Sovereign Yield Spread futures make trading and
    monitoring of sovereign yield spread exposures simpler, more
    cost-effective, and more capital efficient than ever before.
  • Sovereign Yield Spread futures are cash-settled and trade exclusively on CME Globex.

Key facts:

  • Pair-wise spreads among 10-year sovereign bond yields of:
    • France (OATs)
    • Germany (Bunds)
    • Italy (BTPs)
    • Netherlands (DSLs)
    • UK (Treasury Gilts)
    • US (10-Year Treasury Notes)
  • Reference Bond price evaluations provided by a designated third-party price evaluation service
  • Price basis: Modified IMM Index = 100 + Yield Spread
  • Yield spread = "Sold" Nation yield minus "Bought" Nation yield
  • Contracts expire by cash settlement on last trading day
  • Block minimum: 250 contracts
  • Electronically traded on CME Globex
  • Centrally cleared

And just to make sure every retail investor is aware they will now be able to offload dealer exposure, the CME has even provided a video.

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Forgiven's picture

More paper...meh.  Not for me.

Mercury's picture

Sounds like a retail proxy for CDS but with less counterparty risk.

Tyler Durden's picture

Only difference when buying CDS downside is limited. When shorting Treasuries not only is downside unlimited, but huge short squeezes can be created, causing price of underlying to surge, especially if someone dumps an infinite amount of vol at the right time (wink wink).

Mercury's picture

Yeah (unfortunately) I think you're right about this turning into the tail (and tails of tails) that wags the dog.

4shzl's picture

You betcha.  And guess who's positioning for that squeeze in the US 10-yr. as we speak:

That’s the message from the Treasury bond market, where yields on 10-year securities sank to their lowest level in almost a month this week on speculation that government budget cuts will slow the economy and encourage the Fed to hold off from raising borrowing costs, said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co.

“The more fiscal austerity you get, the more likely that the Fed will stay on hold for longer,” El-Erian, whose Newport Beach, California-based company runs the world’s biggest bond fund, said in an April 19 interview on Bloomberg Radio’s “Surveillance” with Tom Keene.

But, but, but ... didn't Mistah Gross just tell us not to own Trashuries??  That's right, Skippy, the nice man lied.

rokakoma's picture

A little bit offtopic, but can anyone help me out, if the debt sucject to the limit is only $26B from the ceiling, how the heck can the Treasury issue $99B next week?


Is there $73B maturing till the settlement date?

FunkyOldGeezer's picture

They need the spreadbetters' money (as in spreadbetting by individuals using spreadbetting companies).

4shzl's picture

CME: turn spreadbetters into bedwetteres.

pappacass's picture

I been spread betting for a few months now as I don't have the capital to go full retard on buying physical gold/silver/farmland and the more I learn from this site the less compelled I am to ever attempt to open an account with a broker.  What I'd love to know is how the spread betting companies work? (Not that I care too much as long as they keep giving me my profits :)

I asked my company a couple of times but keep getting fobbed of.


Mrs Watanabe's picture

with them you have counter party risk and  as they quote their prices, not the 'real' underlying market price, you start off  wrong footed, you loose on the spread they make up.  They prey on underfunded gambler types, looking for  highly leveraged products, these people are fast to stop their clients out in volatile markets, exaggerating moves with their spread, they make the spread and keep the book updated faster than your system, they can do this and create spikes to shake you out.   Its a fools game, go get a proper fully segregated trading account. Unless you know something they don't or are able to move the underlying in your favour and play with them rather than they play with you. (Jesse Livermore was good at playing with them, back then they called them bucket shops).

pappacass's picture

Hey thanks for the reply :)


slewie the pi-rat's picture

the road to default is paved with globex derivatives.  the NWO and IMF nannies are gonna love this shit.  till they don't.  unintended consequences?  Guernsey and the Channel Islands end up ruling the world and use world debt to fill in the English Channel.

youngman's picture

the regulators took away the Mortgage backed securities they had to invent another one to play it is......soon this will crash and another world crisis will happen..and the banks profited from that very well last time...they are still in the power seat.....and the politicians will take all the cash they will give out in this next and silver boys and girls

writingsonthewall's picture

The Dollar / Eur is up and down like a whore's draws at the moment - volatility is back everytwhere - it's almost like there is massive indecision...

theprofromdover's picture

I presume every single initiative in the financial products market from now on will be targeted at the lazy & naive Pension Fund Managers, until they lose it all (sorry, correction -it gets stolen from them/you).

Mrs Watanabe's picture

no new flavor/product thingy going to distract me from the precious metals.

Par Contre's picture

This sounds like the old Diff contract. I can still remember the broker standing in the Diff pit, between the Euro & Currency quadrant, presumably paid by the exchange to take orders that never arrived. He looked lonelier than the Maytag repairman.

Urban Redneck's picture

Paper seeks Paper (banking)

The Bernankasaurus model 2011 runs 24/7 creating ever more paper, and making existing paper options even uglier (toxic)

F/X & % markets dwarf Equity & Commodities markets (opening long oil positions can't absorb closing long USD positions w/o oil going to 4- digits) 

Bankers always feel the need for yield (unless hiding under their desks and avoiding their phones in a mass collective panic)

financial innovation & group-think leads to new products (sort of) since actually building something tangible would require work and time, and couldn't be leveraged for more paper (before happy hour)

Last time it was CDS, this time it is SDS (futures).

Rinse, Repeat