Cash bond traders employing relative value strategies now have a more efficient way to trade the US Treasury curve.
Using the power of CME Globex, BrokerTec RV Curve creates a single market to trade US Treasury benchmark spreads. The key ingredient is the implied order functionality, which connects trading in the RV curve spreads to liquidity available in the outright orderbook.
This means that each leg of the RV order can be executed within BrokerTec’s liquid, central limit order book, alongside outright orders to increase matching opportunities at a set price compared to executing each leg of a curve trade individually. RV orders also benefit from tighter pricing, with quotes at 1/8 of a basis point, creating the opportunity to capture excess yield when RV orders are implied into the central limit orderbook and executed against outright orders. This results in no legging risk or price slippage, while enhancing liquidity and market efficiency.
RV curve spread design
Let’s talk about how RV curve spreads are designed. Each leg of a RV order executes in a pre-determined ratio to approximate DV01 neutrality. The shorter tenor will execute in a greater quantity than the longer tenor, so the trade focuses on the value of the two bonds relative to one another.
Example
A trader is interested in buying the 2-year, 10-year US Treasury spread would be buying the 2-year Treasury and selling the 10-year Treasury. This is a classic trade setup that benefits the trader if the yield curve steepens.
Instead of manually trading both instruments independently in the order book, they could trade the spread as a package transaction with one click through RV curve. “Buying the spread”, within RV curve, would entail buying the front leg and selling the back leg. In this case, buying the 2-year and selling the 10-year at a defined spread in basis points of yield.
Once entered, the order will work against other RV curve orders and in BrokerTec’s central limit order book, alongside orders for the individual bonds. The spread order will only execute if both sides can be filled at the equivalent yield or better. Since the leg ratio for the 2Y-10Y spread is 5:1, one RV Curve order will consist of one leg of $5 million of 2-year notes per $1 million of 10-year notes.
If the trader buys three, they will end up with a position that is long $15 million of 2-year notes and short $3 million of 10-year notes.
Calculating the yield
To calculate the yield at which each leg of the trade is executed, RV curve first takes the yield of the last traded price in the longer tenor from the outright market. The yield of the shorter tenor is then calculated by adding the executed yield differential from the yield of the longer tenor.
Since RV curve can trade at a tighter spread than most outright instruments, at 1/8 of a basis point, and leverages implied technology, the RV order has the opportunity to gain excess efficiency – a better yield – if the trade executes against an order from the outright orderbook.
The BrokerTec RV Curve creates one efficient platform to trade US Treasury benchmark spreads, eliminating leg risk and price slippage, while providing increased liquidity and order matching opportunities for relative value traders.
