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[Refresher] TUU2 Future and WI 2Y analysis| Weekly Release 6/24/22

What is the impact of newly announce WI 2Y w.r.t TUU2?

Many traders asked us to use RiskVal to analyze the impact of newly announced UST June 2024 bond w.r.t TUU2. If you use BBG terminal the TUU2 Comdty DLV you will see the following screen. It shows the T 1.75% 6/30/2024 is the CTD bond.

There are 3 issues with this analysis.

  1. It does not include the WI 2Y

  2. What should the correct WI 2Y coupon be?

  3. What should the repo for this WI 2Y bond be?

To analyze this, RiskVal Future CTD Scenario analysis has feature to include Bloomberg WI bond and user-defined WI bond, for simplicity purpose, we focus on Bloomberg WI 2Y first.

It shows that T 1.75% 6/30/2024 old 5s is the CTD bond for TUU2. It will be an early delivery (ED) due to the NB is lowest between ED (early delivery) and LD (last delivery) NB columns. The BBG WIT 2.875% 6/30/2024 is at least 3 ticks away if early delivery, and very compatible if last delivery.

As you know, RiskVal Market ViewWI tab automatically create a WI 2Y for you. Right now, it uses 3.125% as coupon because the current 2-year level is around 3.05%. Let’s include user-defined WI bond with BBG WI bond together in Future CTD scenario analysis again.

It seems that T 1.75% 6/30/2024 old 5s is still shows as CTD bond for TUU2

But the above analysis didn’t include the WIT2 may have repo special. Let’s assume WI2 is GC -40bp for both earlier and last delivery analysis, and you will see that user-defined WI 3.125% 6/30/2024 is the CTD.

If we assume the WI 2Y has repo special of GC -40bp, then you will notice that the new WI 2Y will become the CTD bond on the last delivery date. Also, the LD NB becomes negative, which will impact your decision on long/short the basis.

You should also take advantage of RiskVal scenario analysis feature, such that you can define your parallel shifts and PCA shifts to look at the NB behavior at delivery date.

I created 5 different scenarios to analyze the horizon Net Basis behavior. (1) curve parallel sell-off 50bp (2) curve parallel sell-off 75bp (3) curve parallel sell-off 10bp (4) PCA slope shock 10 standard deviation (5) PCA parallel shock 5 standard deviation, the below Horizon NB behavior w.r.t each scenario. based on the left "repo" assumption.


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