I am trying to understand the all in cost of implementing continuous, buy and hold Treasury exposure with futures My initial thinking is that implied repo rates shown in CME Treasury Analytics are not representative of the all in cost of the buy and hold strategy. Implied repo rates are driven by idiosyncratic factors in the CTD and the basis trade. Costs of the buy and hold strategy are driven by roll costs Some very rough analysis suggests that the buy and hold futures strategy incurred costs 60-100bps above SOFR, depending on tenor, for the previous 5 years. Can this be right? Such high costs to implement Treasury exposure using futures would completely eat away any term premium and then some. Any buy and hold strategy would seemingly bleed money over time Am I missing something? I know asset managers are net long Treasury futures, I would think they would be sensitive to these implementation costs. Maybe they don't care as much because the yield on their credit portfolio offsets the futures costs. Implementing Treasury exposure with SPX box spreads and ETFs appears more cost effective (ignoring tax implications). VGIT has an expense ratio of 3bps and 3mo boxes are regularly priced ~30bps to SOFR Is my line of thinking here correct? Is there any research on the buy and hold Treasury futures strategy, all papers I have come across relate to the basis trade
what's your view on the rate? that is the first question to be asking, otherwise there is no point but expect a massive drawdown at any major economic news
This is a question on implementation, the rate view is not relevant Initial quick analysis suggests continuously rolling long exposure to Treasury futures can incur costs of SOFR+100, significantly higher than the costs suggested by the implied repo rate Implementing the same strategy with ETFs financed with SPX boxes has costs closer to SOFR+35 This is not an intuitive result to me, and it is not clear to me why the rolling futures strategy is incurring such high costs above SOFR
This is analysis showing costs to replicate Bloomberg Treasury Index with futures was 45bps above SOFR for the period 2018-2023 https://home.treasury.gov/system/files/221/CombinedChargesforArchivesQ12024.pdf My own analysis is suggesting 1) this is could be closer to 60-70bps over the past 5yrs and 2) current period replication cost for some tenors is well above 100bps Other data suggests that the average basis is 10-20bps, eye balling the chart https://www.federalreserve.gov/econ...asury-cash-futures-basis-trades-20240308.html If I roll constant exposure ZF or ZN contracts for 10 years, what is my expected cost above SOFR? Is it 10-20bps suggested by the basis / implied repo rate, 45bps suggested by Bloomberg Treasury Index replication, or 60-100bps suggested by my own analysis of current period financing spreads? In support of my own analysis, there is evidence that financing spreads in the ES futures are also abnormally wide at this time https://www.deshaw.com/assets/articles/DESCO_Imbalance_Sheet_20250123.pdf
Using Treasury bills (T-bills) in a futures account as collateral is a common strategy among professional and institutional futures traders who want to earn interest while still maintaining margin to trade. Here's a clear breakdown of how this process works: ✅ Overview: How It Works Purchase T-bills with Cash: You buy short-term U.S. Treasury bills (typically 4-week to 52-week maturity). This is done either through your broker or directly (e.g., via TreasuryDirect), but in this context, it's usually done through your futures broker or clearing firm. Deposit the T-bills into Your Futures Account: You transfer or purchase the T-bills directly within your futures brokerage account, or you move existing T-bills into that account (must be eligible and held in street name at a recognized custodian). The broker then recognizes the face value or discounted collateral value of the T-bills toward your margin requirements. Use T-bills as Collateral for Margin: The broker allows a percentage of the T-bill value (usually up to 90-95%) to count toward your margin requirement. You can now trade futures using the T-bills as collateral, while still earning the risk-free yield on those T-bills. Example You have $500,000 in cash. You purchase $500,000 worth of 13-week T-bills at a discount (e.g., for $492,000). You use these T-bills as margin collateral for trading E-mini S&P 500 futures. Your broker may allow up to $475,000 of the T-bills to count toward your initial margin. You earn interest on the full $500,000 face value upon maturity, while actively trading.
You already answered almost all of your own questions. The futures basis is not relevant for replication cost. I would point you to the related bogleheads thread, but given the language and material that you used, you probably collected most of your information from there. I doubt you will get meaningful answers in this forum, as most traders will have no clue what you are talking about, nor do they care. But I would be happy to be positively surprised.
you are not wrong but not sure where you are headed. sofr is overnight that is almost effectively fed funds rate, maybe less than 5bps spread. zn zf zb are futures expectations. overall financial conditions tightness and fx carry trades play important roles. if you are carrying positions indefinitely, that in itself will not make any money, just exposures, unless on the right side of multiyear rate cycle. i carried long zt and zn positions when the yield is nearly the high (late feb?) and sell weekly/bi-weekly/monthly covered calls for the premiums. however it wasn’t a sure trade, got called away 2 weeks ahead the expiration because cheetos made announcement, with low five figures profits of course, looked up my post in es thread. then again, merely have the positions opened doesn’t mean a thing without exiting, that’s where long and short bets came in on futures.
Been thinking about your question over the last few days. If I wanted to hold a futures rate to maturity I would use either SOFR Bundles for say 1yr's to 5yr's and just mature each qrt. contract as I rolled down the curve. CASH Settled or ERIS SOFR swap contracts Bloomberg code = YIYM25 for 10yrs. You can hold these contracts to maturity as they do not have to roll off like regular Treasury futures do. In fact if you look at the contract table they are quoted from June 15 through June 25. You could just carry the swap rate to your needed maturity point. They have contracts all along the curve from 1yr to 30yrs. CASH Settled Advantage would be not having to roll quarterly vs liquidity on an early needed exit. I have traded them in the past, mostly the frontend and always exited prior to the roll. I have no positions and do not trade them currently.
None of that will solve the original poster's problem. With SOFR futures or swaps you pay the swap spread, which currently is roughly equal to the treasury futures replication cost.
But you are still paying margin interest to buy the futures and our borrowing at a much higher rate, no? Using 500K as collaterol still leaves you with $0 in cash (just the opportunity to borrow), so when you trade you are always borrowing at a higher rate. What am I missing? If you only use like 30% of your margin, the overall interest is less despite the higher borrowing yield. Is that the thought?