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FinanceandEconomicsDiscussionSeries
FederalReserveBoard,Washington,D.C.
ISSN1936-2854(Print)
ISSN2767-3898(Online)
ReachingforDurationandLeverageintheTreasuryMarket
DanielBarth,R.JayKahn,PhillipMoninandOlegSokolinskiy
2024-039
Pleasecitethispaperas:
Barth,Daniel,R.JayKahn,PhillipMonin,andOlegSokolinskiy(2024).“ReachingforDurationandLeverageintheTreasuryMarket,”FinanceandEconomicsDiscus-sionSeries2024-039.Washington:BoardofGovernorsoftheFederalReserveSystem,
/10.17016/FEDS.2024.039
.
NOTE:StafworkingpapersintheFinanceandEconomicsDiscussionSeries(FEDS)arepreliminarymaterialscirculatedtostimulatediscussionandcriticalcomment.TheanalysisandconclusionssetfortharethoseoftheauthorsanddonotindicateconcurrencebyothermembersoftheresearchstafortheBoardofGovernors.ReferencesinpublicationstotheFinanceandEconomicsDiscussionSeries(otherthanacknowledgement)shouldbeclearedwiththeauthor(s)toprotectthetentativecharacterofthesepapers.
ReachingforDurationandLeverageintheTreasuryMarket*
DanielBarth,R.JayKahn,PhillipMonin,andOlegSokolinskiy
BoardofGovernorsoftheFederalReserveSystem
May23,2024
Abstract
Weshowsubstantialvariationinmutualfunds’useofTreasuryfutures,bothovertimeandacrossfunds.ThisvariationfrommutualfundsdrivesmuchofthetimeseriesvariationinaggregateTreasuryfuturesopeninterest,includingover60%oftherecentriseinTreasuryfuturespositions.WeprovideevidencetheseTreasuryfuturespositionsarelargelyattributabletomutualfunds“reachingforduration”inordertotrackthedurationofabenchmarkindexwithhighcashTreasuryexposure.Specifically,weshowmutualfundsusefuturestofillthegapbetweentheirportfolioandtheindexthatresultswhentheytilttheircashpositionstowardhigherreturnbutlowerdurationassets,suchasmortgage-backedsecuritiesandequities,andawayfromcashTreasuries.TreasuryfuturespositionsaremorecommoninmutualfundswhichindicateafocusondualobjectivesofdurationmanagementandtotalreturnwhosestylehasahigherallocationtoTreasuries.Reachingfordurationallowsfundstotracktheirindexbetteratlowercost,butincreasesleverageintheTreasurymarketboththroughmutualfundslongTreasuryfuturespositionsandthroughtheleverageofhedgefundswhotakethecorrespondingshortpositionsinTreasuryfutures.
Keywords:Treasurymarkets,mutualfunds,duration,indexing,futures,mortgage-backedsecurities
JELCodes:G11,G12,G13,G23
*DanielBarth(daniel.j.barth@),R.JayKahn(jay.kahn@),PhillipMonin(phillip.monin@),OlegSokolinskiy(oleg.v.sokolinskiy@).ViewsandopinionsarethoseoftheauthorsanddonotnecessarilyrepresenttheviewsoftheBoardofGovernorsoftheFederalReserveSystem.WethankDouglasDiamond,AnthonyLeeZhangandparticipantsattheUniversityofChicagoBoothBankingSeminarforhelpfulcommentsandAudreySelleyandMelindaWangforexcellentresearchassistance.
1
1Introduction
Recenteventshaveillustratedtherisksofnon-bankleverageinTreasurymarkets.InMarch2020,largesalesbyavarietyofTreasuryinvestorsplacedpressureonleveredactorsintheTreasurymarketthatmayhaveexacerbatedageneraldashforcashandtherebycontributedtoaburstofilliquidity.1Similarly,leverageamongLiabilityDrivenInvestmentcompaniescontributedtothe2022giltmarketcrisis.2Historically,leveredbetsinTreasurymarketsalsocontributedtoTreasurymarketinstabilityinthe1950sand1960s.3TherisksposedbyoutsizedleverageintheTreasurymarketmakeunderstandingtheincentivestoleverTreasurypositionsanimportantareaoffocusforregulatorsandpolicymakers.Yet,becauseofthedifficultyinobservingtheactivitiesofmostnon-bankactors,therehavebeenrelativelyfewstudiesofthedeterminantsofcross-sectionalandtime-seriesvariationinleverageinTreasurymarkets.
Inthispaper,weexaminemutualfundleverageintheTreasurymarketresultingfromlongTreasuryfuturespositions.Weformauniquedatasetbymerginginformationonmutualfundsandtheircashandderivativesinvestmentsfrommultiplesources,includingregulatorydataandfundprospectuses.Usingthisdata,weshowthatmutualfunds’demandforlongTreasuryfuturesissubstantial:mutualfundsmakeuproughly53%ofallassetmanagerlongTreasuryfuturespositions,whichstoodat$579billioninnotionaloutstandinginJune2023,and31%oflongopeninterestinTreasuryfutures.Moreover,thereissubstantialtimeseriesandcross-sectionalvariationintheuseofTreasuryfuturesbymutualfunds.Futuresusebymutualfundsexhibitsastrongprocyclicalpattern,fallingbyalmost25%betweenDecember2019andJune2021beforerisingby65%betweenJune2021andJune2023.Between2021and2023,mutualfundsmadeup62%oftheincreaseintotalopeninterestinlongTreasuryfutures.Further,whileTreasuryfuturespositionsareconcentratedinafewmutualfundstrategies,evenwithinthesestrategiestherearelargecross-sectionaldifferencesinTreasuryfuturesholdings.
Weprovideevidencethatthisvariationisdrivenbyfunds’incentivesto“reachforduration,”usingTreasuryfuturestolengthenthedurationoftheirportfoliotomatchtheinterestrateriskoftheirbenchmarkindexeswhilereducingtheircashTreasurypositionsandinvestinginotherse-
1See
Duffie
(2020)
Heetal.
(2020),
Schrimpfetal.
(2020),
Vissing-Jorgensen
(2021),
BarthandKahn
(2021)and
Kruttlietal.
(2021)amongothersforadiscussion
.
2See
Pinter
(2023)and
Alfaroetal.
(2024)
.
3See
Garbade
(2021),
KahnandNguyen
(2022)and
MenandandYounger
(2023)
.
2
curitieswithhigherexpectedreturns.Specifically,whenfixed-incomemutualfundsincreasetheirlongTreasuryfuturespositions,theysimultaneouslydecreasetheirholdingsof(longer-duration)Treasurysecuritiesandincreasetheirholdingsof(shorter-duration)mortgage-backedsecurities(MBS).Wefindthatfundswithbroaderobjectivesalsoincreasetheirholdingsofequities.ThissuggeststhatbyusingTreasuryfutures,mutualfundscantracktheirbenchmarkindexeswhileholdinglesscashTreasuriesandmorehigher-yieldingassets.
Reachingfordurationresultsfromatensionbetweenthedurationoftheindexthatfundsarebenchmarkedagainst(often,forfuturesusers,theBloombergU.S.AggregateIndex)andtheneedtogeneratereturns.Treasuryholdingstendtobeboththehighestdurationandoneofthelower-yieldingassetsinfixed-incomefundportfolios.TheshareofTreasuriesintheAggregateIndexisbothlargeandhasgrownovertime,risingfrom35%in2011toalmost45%in2023asTrea-suryissuancehasexpanded.Inadditiontobeinglow-yielding,theseTreasuriesarealsoprimarilyoff-the-run,makingthemcostlytoholdrelativetoothermoreliquidandhigher-yieldingassets.ActivefundsthereforehaveanincentivetoallocateawayfromtheseTreasuriesandtowardsotherassets.Indeed,wefindthatingeneralactivefundstrackingtheAggregateIndexhavelowerdu-rationthantheindexbuthigherreturns.Byusingfutures,fundscanobtainasimilardurationtotheAggregateIndexusingfewercashTreasuries.WefindthatthemutualfundsthatuseTreasuryfuturestracktheirbenchmarkindexbetteroverall,eventhoughthedurationoftheircashhold-ingstendstodiffermorefromthedurationofthecashholdingsintheindexwhentheirfuturesholdingsarehigh.Weshowthatthesefunds’futuresholdingsclosethegapbetweenthedurationoftheircashpositionsandthedurationofthebenchmarkindex.
Theincentivetoreachfordurationisdriveninlargepartbytheopportunitycostofinvestinginhigher-durationassets:foregonepositionsinlow-durationassets.Overrecentquarters,weshowmuchofthevariationinreachingfordurationisdrivenbychangesinreturnstoinvestinginlow-durationmortgage-backedsecuritiesrelativetoTreasuries.WefindthatTreasuryfuturesholdingsarelargerwhentheexpectedreturnsonmortgage-backedsecuritiesarehigher,measuredbothintermsofoption-adjustedspreadsanddollarrollspecialness.Theincreasedallocationtowardsmortgage-backedsecuritiesandawayfromTreasuriesthatresultsdrivesmostofthechangesinthedurationofcashassetsforfuturesusersrelativetotheindexthatfuturesusersthenmakeupwiththeirderivativesholdings.
3
Inthecross-sectionoffunds,wefindthattheuseoffuturesishighlypersistent,andthelargestfuturesuserstendtobethesamefundsovertime.Thereislittledifferenceinperformancebe-tweenfuturesusersandnon-users,buttheflow-performancerelationshipisweakerforfuturesusers,whichmaybeduetodemandforthedurationexposurethesefundsprovide.AmongTreasuryfuturesusers,theuseofderivativesisoftenspecificallymentionedintheirprospec-tuses’sectionsonprincipalrisksandstrategiesandissignificantlylesscommonlymentionedbynon-users,providinganimportantbartoshort-termentry.Wefindfuturesuseismorecommonamongfundsthathaveagreaterincentivetoreachfordurationalongtwodimensions.First,theyaremorelikelytotracktheirbenchmarkindexesmoreclosely,andtheirprospectusesmaystateexplicitgoalstomatchtheirbenchmarkindexduration.Second,theyappeartobemorelikelytotakeonactivepositionsthatcountontheappreciationofsecurities.Inparticular,evidencefromfundprospectusesindicatesthatfundswithhigherfuturespositionstendtohavehigherturnover,objectivesfocusedontotalreturnratherthanincome,andhigherfees.Takentogether,thiscon-stitutesstrongevidencethatmutualfundleverageinTreasuryfuturesisdrivenbyincentivestoreachfordurationthatvaryoverthecycle.
OurresultsshowthatmutualfundsuseTreasuryfuturestomatchtheirbenchmarkindexre-turnwhiletiltingtowardshigher-yieldingassetswiththeircashportfolio.Thisstandsincontrasttorecentresearchonmutualfunduseofderivativesincluding
KanielandWang
(2022)and
Choi
etal.
(2023)
.Inbothcases,theauthorsfindthatmutualfundsusederivativesprimarilyasameansofamplifyingreturnsandtakingonadditionalrisk.WhilewefindthatfundsthatuseTreasuryfuturesareincreasingthedurationoftheiroverallportfolio,weshowthatthesefundsgenerallyremainbelowthedurationoftheindextheytrack.Fundswithhighuseoffuturesarethereforeclosertotheperformanceoftheindexthanthosewithout.Meanwhile,bothhighfuturesusersandfundsthatdonotusefuturestiltawayfromtheindexindifferentways.Theclosestcompa-rablepapertoourownis
Choietal.
(2023),whichexaminestheuseofinterest-ratederivatives
bymutualfunds.WhiletheirsampleincludesusersofTreasuryfutures,itisdominatedbyusersofinterest-rateswaps.Theyfindthatfundsareoftenusinginterest-ratederivativesforspecula-tionandthatderivativeportfoliosandcashportfoliosareoftenunrelated.Incontrast,wefindthatfundsuseTreasuryfuturesspecificallytomatchtheirindexdurationwhiletiltingtowardshigher-yieldingassetswiththeircashportfolio.Ratherthansuggestingthatmutualfundsare
4
usingTreasuryfuturesforindependentspeculationortoamplifyreturns,weshowthatmutual
fundsareusingTreasuryfuturestoreachforyieldinawaythatisconsistentwiththeirover-allinvestmentobjectivesandthestructureoftheirbenchmarkindexes.Therefore,inthecaseofTreasuryfutures,wefindthatcashpositionsandfuturespositionsareintimatelyrelated.
Indemonstratingthetilttowardsriskiermortgage-backedandasset-backedsecuritiesbymu-tualfundsthatuseTreasuryfutures,ourpaperalsocontributestoalargeliteratureonrisk-takingandreachingforyieldinmutualfundsandotherassetmanagers,including
KacperczykandSchn-
abl
(2013),
BeckerandIvashina
(2015),
DiMaggioandKacperczyk
(2017),
ChoiandKronlund
(2018)and
ChenandChoi
(2023)
.Reaching-for-yieldbehaviorissimilartothereach-for-durationbehaviorwedemonstrateinthispaperinthatinbothcasesthefunds’portfolioistiltedawayfromtheindexandtowardshigheryieldassets.Thetwobehaviorsthereforebothresultfromatensionbetweentheneedtogeneratereturnsandtheneedtomatchanindexorbenchmark.However,thereach-for-durationbehaviorweexamineinvolvesweightingtheportfolioofthefundtowardsonehigher-yieldingassetclassawayfromanothergivenanoverallobjectivetomatchduration.Ontheotherhand,reachingforyieldinvolvestiltingtowardshigher-yieldingassetswithinaclassorrating,givenanobjectivetomaintainacertainshareineachratingorassetclass.Inthecaseofreachingforduration,weshowthatthetensionbetweenreturnsandbenchmarkingcanulti-matelyhaveconsequencesforfinancialstabilitythroughdrivinglargemutualfundpositionsinTreasuryfutures.
ByexamininglongpositionsinTreasuryfutures,wealsocontributetotheliteratureonthecash-futuresbasistrade.4ThisliteraturehasgenerallydiscussedshortpositionsinTreasuryfu-tures,whichasdiscussedby
Schrimpfetal.
(2020),
BarthandKahn
(2021),
Kruttlietal.
(2021),
Banegasetal.
(2021),
Barthetal.
(2023)and
Glicoesetal.
(2024)areoftentakenbyhedgefunds
toexploitapositivebasisbetweencashandfuturesmarkets.TheexistenceofapositivebasishasoftenbeenexplainedasaresultofthecostsofholdingcashTreasuriesfordealers,asin
Flecken-
steinandLongstaff
(2020)and
Duetal.
(2023)
.Thisleavesopenthequestionofwhyotheractorswouldbewillingtotakethelongfuturesposition.Ourresultssuggestthatmutualfundstakethe
4Cash-futuresbasesexistinmanymarketsoutsideofU.S.Treasuries.Forinstance,
Hazelkornetal.
(2023)studies
thecash-futuresbasisinequitymarkets.Theyfindthatflowstomutualfundstrackinganindexareanimportantdriverofdemandforthatindex’sequityfutures,butintheircasetherelationshipappearstobefrommutualfunds’demandforthecashindexratherthanfutures.
5
longsideoffuturespositionstoshifttheircashholdingsawayfromTreasuriesandtowardhigher-yieldingcashassets.ApositivebasismeansthatthisleveragecouldtheoreticallybeaccomplishedmorecheaplyusingTreasurycashsecuritiesborrowedintherepomarket.However,weprovideevidencethatmostmutualfundsareseverelylimitedintheirabilitytouserepoleveragebythetermsoftheirprospectusesandbythecostsoftransactingintherepoandcashTreasurymarket.Moreover,consistentwiththemodelin
BarthandKahn
(2021),ourresultssuggestthatmutual
funddemandforTreasuryfutures,drivenbyanincentivetoreachforduration,maybeacontrib-utortotheoveralldemandforTreasuryfutures,andthereforetothepositivebasisdistinctfromthebalancesheetcostsofdealers.
Finally,ourresultshaveimplicationsfortheliteratureonTreasuryinconvenience.Resultsin
Duffie
(2020),
Heetal.
(2020),and
Duetal.
(2023)suggestthatasTreasuryissuancecontinues,the
costofholdingTreasurieshasrisensubstantially.However,thefocusofthesepapershasgenerallybeenonregulatorycoststolargeTreasuryexposuresondealerbalancesheets.OurresultspointtosubstantialimplicitcostsofholdingcashTreasuries,andespeciallyoff-the-runcashTreasuries,formutualfunds—coststhatareavoidedbythesefundsholdingfuturesinstead.ThegeneralriseinoutstandingTreasurieshasledtoariseintheshareofTreasuriesintheindexfundsmanymutualfundstrackandtherebymayhaveincreasedtheneedformutualfundstoallaythesecosts.WealsoshowthatthedemandfrommutualfundsforTreasuryfuturestoreplaceTreasurysecuritiesdependsonthereturnstoMBS,whichprovidesanimportantlinkfromTreasuryinconveniencetootherassetmarketsand,implicitly,therealsideoftheeconomy.
2Data
Foraggregatefuturesdata,weusetheCommodityFuturesTradingCommission’sTradersinFi-nancialFuturesdata,whichprovidesweeklyinformationonlongandshortpositionsforbroadcategoriesofinvestors—dealers,assetmanagers,leveragedinvestors(primarilyhedgefunds),andothers,andforawiderangeofcontracts,includingTreasuryfutures.
Werelyonthreeprincipalmicro-leveldatasources:theCRSPSurvivor-Bias-FreeUSMutualFundData,theSEC’sFormN-PORT,andahand-collecteddatasetformedbyscrapingmutualfundprospectuses.
6
TheSEC’sFormN-PORTprovidesdetailedportfolioholdingsformutualfundsonaquarterlybasis,aswellasfund-levelinformationincludingassetsandliabilities,certainriskexposures,andreturns.Fundsthattogetherwithotherfundsunderthesameparentinvestmentcompanyhavenetassetsof$1billionormorewererequiredtobeginreportingFormN-PORTfortheperiodendingMarch31,2019,butfilingsonlybecamepublicstartingSeptember30,2019.SmallerfundgroupsbeganreportingfortheperiodendingMarch31,2020.
WescrapetheuniverseofN-PORTfilingsfrom2019to2023fromtheSEC’swebsite.Thisre-sultsin208,579filingsintotal.Forourpurposes,thekeyadvantageoftheN-PORTdataisthatithasdetailsonfunds’holdingsofderivatives.Importantly,N-PORTidentifiesfutures,swaps,for-wards,andoptionpositionsseparately,whichallowsustofocusontheTreasuryfuturesholdingsofmutualfunds.WethereforeprimarilyusetheN-PORTdatatoidentifyfuturespositions.WeverifythevalidityofbothdatasourcesbycomparingfieldswheretheN-PORTdataandCRSPdataoverlapandfindtheyprovidesimilarresults.
WeusekeywordstoextracttheTreasuryfuturespositionsfromN-PORT.Forinstance,futuresderivativepositionscontainingthestrings“2y,”“5y”and“10y”arelikelytobe2-year,5-yearand10-yearTreasuryfuturespositions.However,wearecarefultoexcludewordssuggestingthatthesemaybenon-U.S.futurespositions,suchas“EUREX,”“JPN”or“gilt.”Similarly,positionslabeled“TU”,“FV”or“TY”arelikelytobe2-year,5-yearand10-yearTreasuryfuturesbecausethesestringscorrespondtothetickerslistedonBloomberg.Finally,wespot-checkthisclassifica-tionagainstasampleoffundstoensurethattheprocedureisaccurate.Inall,weidentify96,227uniqueTreasuryfuturespositionsacrossfundsandovertime.
Inadditiontothedataonfuturespositions,wealsousetheN-PORTdatafordetailedinfor-mationonholdingsofcashassets.N-PORTprovidessomegeneralclassificationsofinvestmentsbasedontheirassettypeandissuer.Mostoftheseclassificationsarestraightforward.WeclassifyinvestmentsasTreasurieswhenevertheirissuerisidentifiedastheTreasuryDepartment,whichcanincludecertainbillsotherwiseclassifiedonN-PORTascashassets.InvestmentsinMBSareclassifiedasagencyMBSwhentheyarerecordedasMBSandtheirissuerisaU.S.governmentagencyorgovernment-sponsoredenterprise,andasprivate-labelMBSiftheirissueriscorporate.
Toprovidemoredetailonfixed-incomeinstruments,weuseICEpricingandvaluationdata.Thisdatacoversawiderangeoffixed-incomesecurities,includingcorporatedebt,ABS,MBS,
7
Treasuries,andnon-U.S.sovereigndebt.Itcontainstwokeyfeaturesforouranalysis.Thefirst
isthedurationofcashinvestments,whichweusetostudytheoveralldurationofmutualfunds’cashportfolios.ThesecondisratingsforcorporatedebtbyFitch,Moody’s,andS&P,whichweusetoclassifycorporatedebtsecuritiesintoinvestment-gradeandspeculative-gradedebt.Weclassifyinvestmentsasspeculativegradewheneveratleastoneofthesethreeratingagenciesratesitasspeculativegrade.WematchthisdatatoN-PORTinvestmentsbasedontheCUSIPofthesecurityandthedateofthefiling.
WhileICEcoversabroadrangeofinstruments,wedonothaveaccesstodetailsondurationfortheto-be-announced(TBA)MBSmarket.Aswedescribebelow,theTBAmarketisapopularinvestmentforcertainmutualfundsheavilyinvestedinTreasuryfutures.WeusedatafromJPMorganMarketstoprovideanestimateofthedurationoftheseinstruments.WealsouseJPMorgandataonspreads,duration,convexity,anddollarrollspecialnessforaggregateanalysis,andforthedurationofTreasuryfuturescontracts.Thissamplecoverstheperiodfrom2012to2023.
WeusetheSEC’sMutualFundProspectusRiskReturndatasetandscrapeadditionaldatafromtheSEC’swebsitecoveringtheuniverseofmutualfundprospectuses.Weusethisdatatoidentifythestatedobjectives,strategies,andrisksoffunds,theirbenchmarkindexes,andtoidentifyfundsthathavestatedobjectivestousederivatives.Wemergebasedonfunds’SEC-assignedseriesidentifier.Forasubsetoffixedincomefundsweareinterestedintheirbenchmarkindex.AsubsetoffundsliststhisbenchmarkdirectlyintheirN-PORTfilings,inwhichcaseweusethisasthefundbenchmark.Fortheremainingfunds,thebenchmarkisdeterminedbymatchingkeyphrasesinthefundprospectustoalistofcommonfixed-incomebenchmarks,suchastheBloombergU.S.AggregateIndex,theBloombergU.S.UniversalIndex,ortheBloombergCreditIndex.First,wesearchtheprincipalstrategysectionoftheprospectustofindamatch.Ifwecannotfindamatchinthissection,wethensearchtheremainderoftheprospectus.
WethenmergetheN-PORTdatawiththeCRSPSurvivor-Bias-FreeUSMutualFunddatatoobtainacomprehensivedatasetofmutualfundholdings,returns,fundcharacteristics,andfuturespositions.TheCRSPdataprovidesmonthlyholdingsanddailyreturnsformutualfunds.Weusedatabeginningin2015forthepurposesofthisstudy.CRSPidentifiersdonotoverlapwiththeN-PORTdata.Weperformamatchbetweendatasetsfirstusingfundtickerswherepossibletomatch
8
betweenthetwosets,thenusingfundnameswheretickersarenotavailable.Whenmatchingonfundnames,wefirstlookforwhethertheCRSPnamecontainsboththeseriesnamefromN-PORTandtheregulatorynamefromN-PORT,sinceoftentheCRSPnameisaconcatenationofthesetwonameswithadditionalcharactersdescribingtheshareclass.Inthecasethatthisprocedureproducesmultiplematches,wethenhand-selectbetweenthematches.Foraselectgroupoffundsthatweareunabletomatchusingthisprocedure,wethenhand-matchthefunds.Weareabletomatch13,481fundsbetweenthetwodatasetsfortheperiod2019through2023.
3AggregateTreasuryfuturespositionsofmutualfunds
OneofthemoredramaticchangesinTreasurymarketactivityoverthepastdecadeisthesignif-icantriseinTreasuryfuturesvolumes.AggregatepositionsinTreasuryfutureshaverisenfromroughly$500billioninnotionalexposurein2010toover$2trillionin2024.Thisgrowthhasre-ceivedattentionprimarilyduetoworriesaboutthegrowthinhedgefunds’shortTreasuryfuturespositions,whichseemtoprimarilysupporttheiractivityinthecash-futuresbasistrade.5Yet,muchlessisknownabouttheincentivesforinvestorstotakelongpositionsinTreasuryfutures.Below,wedescribetheessentialfeaturesoftheU.S.Treasuryfuturesmarket.WethenshowthattheprimaryinvestorsinlongTreasuryfuturesareassetmanagers,withthemajorityofpositionsaccountedforbymutualfunds.Wedemonstratethesepositionsshowsubstantialvariationovertimeandacrossfunds,thoughitisusuallythesamefundsholdingthelargestfuturespositionsacrosstime.Therestofthepaperthenfocusesonwhatdrivesboththetime-seriesandcross-sectionalvariationinmutualfundholdingsofTreasuryfutures,tounderstandthedriversofthismajorconcentrationofleverageintheTreasurymarket.
3.1Structureofthefuturesmarket
TheTreasuryfuturesmarkethasbeencoveredelsewhereingreatdetail,forinstancein
Burghardt
andBelton
(2005)and
BarthandKahn
(2021)
.Here,weprovideabriefoverviewofsomesalientfeaturesofthemarketstructureandtheroleofassetmanagersinthismarket.
5See
Schrimpfetal.
(2020),
BarthandKahn
(2021),
Kruttlietal.
(2021),
Banegasetal.
(2021),Barthetal.
(2023)and
Glicoesetal.
(2024)
.
9
Treasuryfuturesareofferedatavarietyofdifferentmaturitypoints.Themostcommoncon-tractsarethe2-year,5-year,10-year,and30-yearTreasuryfutures.Eachcontractissettledviaphysicaldelivery.TheCBOTallowsforseveraldifferentTreasuriesinaspecifiedrangeofmatu-ritiestobedeliveredintoeachcontract.AllowingthedeliveryofmultiplesecuritiesiscommonlythoughttoaffordadditionalliquiditytotheTreasuryfuturesmarket,andtheTreasuryfuturesmarketisgenerallythoughttobemoreliquidthanTreasurycashsecurities,providedthosesecu-ritiesarenoton-the-run(see
Bakeretal.
(2020))
.
Theprice,duration,andyieldofaTreasuryfuturescontractarerelatedtotheunderlyingTrea-suriesbecauseoftheoptiontophysicallydeliverTreasuriesintothecontractatexpiration.Thisnear-arbitragerelationshipisenforcedbytheTreasurycash-futuresbasistrade,whichisdiscussedatlengthin
BurghardtandBelton
(2005),
FleckensteinandLongstaff
(2020)and
BarthandKahn
(2021)
.Asaresultofthistrade,thepriceandriskattributesofaTreasuryfuturescontractwillcloselyreplicateaTreasurycashsecurity,thedifferencebeingthatthefuturescontractdoesnotrequirethefullnotionalamounttobepostedupfront.Theonlycashrequirementattheinitiationofafuturescontractistheinitialmargin.Variationmarginmayalsobecalledifthepositionde-preciates(orappreciatesfortheshortposition)enough.ThisallowsfortheuseofleverageintheTreasuryfuturesmarket,whichwediscussbelowasakeyfeatureoftheattractivenessofTreasuryfuturestoassetmanagers.
3.2AssetmanagerTreasuryfuturespositions
Asdiscussedin
BarthandKahn
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