Could be; but on the other hand during parts of the ZIRP period the low maturity end of the curve was flat at zero, and certainly did not contribute to any roll-down returns; the STT might have had lower risk-adjusted returns during this period, as well as during the subsequent curve flattening period. I tried to account for the duration difference in my analysis, eyeballing sub-periods with similar yields at start and end (have to look at the FRED charts because the charts above include the 5%+ risk-free rate); and like I said, the 3-5 year basket and the 5-year treasury bond reversed roles after the 2021 peak, while the ZF did not follow that pattern of outperformance of shorter maturities over the entire period.Thanks for posting these and the ZT comparison. I would guess the 3-5 year index benefits a bit from heavier weighting in the outperforming 0-3 segment of the curve than ZF has.
To your point: First off, the ZF has lower duration than the 3-5 year basket, if you look at the performance from 10 years ago to the peak in 2020. Secondly, ZF even underperforms the even higher duration 5-year bonds despite the tailwind of lower duration during this rising rates period. Third, the 3-5 year basket and the 5-year treasury bond reversed roles after the peak, and the 3-5 year basket prevailed during the entire period, indicating that shorter maturities had a tailwind over the entire period. Whereas the ZF did not follow that pattern, but underperformed both. Putting these three facts together made be believe that the implied financing cost was higher than the annualized 0.37% which is the CAGR difference between ZF and the 3-5 year bond basket.
Still have to reconcile this with the papers that attest to near zero financing cost up to a few years back.
Of course only exact matches on the maturity range can directly demonstrate implied financing cost, and ideally we would compare the zero coupon or forward curves to eliminate the effect of coupons. But we could perhaps draw a line in a financing spread vs duration (maturity) chart between all available futures contracts, and another one between all available treasury bond indexes and ETFs, interpolating the results. The 0.37% seems to be a lower bound, if my interpretation is right.
I still have SOFR futures strips in my accounts that I want to decide to either continue or to replace with treasury futures. I'm trying to get to the grounds if the treasury futures implied financing cost has risen and whether it is related to the increased swap spreads, and if SOFR futures prices mimic those spreads.
Statistics: Posted by comeinvest — Wed May 29, 2024 12:57 am — Replies 3071 — Views 707662
