Example

Assume you have a short position of 100 contracts ($10M) in the 4.0% for Dec-22. You need to roll out of the short position and into one in the 4.5% coupon for Dec-22. You can do this by selling 100 of the Dec-22 4.5%/4.0% coupon swaps.

Prior to the “3:00 p.m. close” on the afternoon of November 17, 2022, the Dec-22 4.5%/4.0% coupon swap was observed trading on CME Globex with bid price of 2’205 and an offer price of 2’243. On the bid side, 20 of the 45 contracts were implied from other markets, nearly doubling the size of the top of the order book. The implied bid matched the observed bid, and the observed offer was better (lower price) than the implied offer in the spread.

Meanwhile, the Dec-22 4.5% had a bid/offer of 96’165/96’190, and the Dec-22 4.0% had a bid/offer of 93’247/93’280. Later that day, the Dec-22 4.0% and 4.5% coupons settled at prices of 93’262 and 96’185, respectively.

Please refer to Exhibit 1 for the recent markets observed on CME Globex.

Exhibit 1: TBA futures and coupon swap markets on November 17, 2022

fig
Source: CME Group

Exhibit 2: Breaking down implied and actual markets in the coupon swap of TBA futures