History Is Repeating Itself: Get Ready for a Long Dry Spell

Financial Analysts Journal
Third Quarter 2017 | Vol. 73 | No. 3 | 25 pages
Source: CFA Institute
Ramzi Ben-Abdallah Michèle Breton

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The recent disappearance of a five-year maturity gap from the set of bonds deliverable to the Chicago Board of Trade Treasury bond futures has resulted in a distinctive configuration, whereby a single T-bond will have the shortest remaining maturity in the delivery basket of bonds for a five-year period. This situation would be inconsequential were three other conditions not simultaneously present, ensuring that this single bond will probably be the cheapest-to-deliver bond over the next five years. We show that a similar alignment of conditions happened in 1994–1999, during the “long dry spell of the 11¼%.” We recall the detrimental repercussions of that dry spell on the bond markets and suggest possible steps to remedy the current situation.

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  • Derivatives:
    • Futures Markets and Instruments
  • Fixed Income:
    • Analysis of Credit Risk
    • ·
    • Fixed Income Markets - Characteristics, Institutions, and Benchmarks
    • ·
    • Term Structure Determination and Yield Spreads
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