how to trade the butterfly treasury spread
FTSE Group has produced a series of Interest Rate Swaps Indices under the banner the FTSE MTIRS Index Series.
Clive Connors CEO of Pipeline Capital, an index company which designs, constructs and brokers Indices, said;
"This is an extraordinary Index which reflects perfectly the Fixed for floating interest rate swap market as a percentage of par, it is spot on, a ground breaking concept, and I cannot think of anyone better to be on the forefront of that Innovation than FTSE."
"Your position is constantly being valuated in real-time on the screens of the most important real-time providers Bloomberg, Reuters and Thompson you can always see the current index valuation."
"When using FTSE MTIRS index trades, you do not worry about financing, executing repo business or calculating fair close-out values of IRS positions, It is that simple: your position always is worth: your nominal amount times current index value minus entering index Value divided by 100."
The MTIRS Index Series has been set up to allow market participants to trade the index. The indices are calculated in real-time to reflect the movement in the underlying fixed for floating interest rate swaps market.
The FTSE MTIRS Index has the added attraction of standardizing trade details, reduced transaction costs, providing transparency of pricing and alleviating the need for back office monitoring of positions and calculating position value: the trader can compute his profit or loss very simply.
FTSE MTIRS US Dollar Swaps Indices
The first indices to be launched in the FTSE MTIRS Index Series were the FTSE MTIRS US Dollar Swap Indices. FTSE is currently developing indices for the Euro, Sterling and Yen markets. The US Dollar semi-bond versus 3M LIBOR indices were launched on the 13th September and initially comprises 45 indices. They are:
- For every government security lifetime from 2 to 30 (full) years = 29 Indices
- Index reflects to buy the trade, i.e. to enter a swap as fixed-rate receiver and floating-rate payer
- Indices for IRS Spread Trades:
- All possible combinations of benchmark US Government treasury lifetimes (2, 3, 5, 10, 30)
- Buy the long maturity and sell the short maturity = 10 indices: 2x3, 2x5, 2x10, 2x30, 3x5, 3x10, 3x30, 5x10, 5x30 and 10x30
- The IRS spread requires two simultaneous trades buying or selling the shorter period (short leg), whilst trading the reverse selling or buying the longer period (long leg)
- Indices for Interest Swap Butterfly Trades:
- Certain combinations of benchmark US Government treasury lifetimes buy the body and sell the wings
- The most prevalent butterfly trades = 6 indices: 2x3x5, 2x5x10, 2x10x30, 3x5x10, 3x10x30, 5x10x30. Though any other combinations are possible
- The IRS butterfly requires three simultaneous trades buying or selling the shorter period and longer period, (the wings) whilst trading in the opposite direction, selling or buying the middle period (the body)
- Spread Trades and Butterfly Trades notional amount adjustments.
- Spread trades: The notional amount of the long leg (bought into the index) is $25 million. The notional amount of the short leg (sold into the index) is adjusted so that the Modified Duration of the short leg, at the start of the index, or at rebalancing time respectively, is the same as the Modified Duration of the long leg
- Butterfly trades: The notional amount of the body (bought into the index) is $25 million. The body may be considered as divided into two parts of $12.5 million each. The notional amounts of each of the wings (sold into the index) is adjusted so that its Modified Duration, at the start of the index, or at rebalancing time respectively, shall be the same as the Modified Duration of the half body
- All IRS trades shall be sold and newly bought synthetically once every month
- This rebalancing also avoids the shortening of lifetimes to maintain the key terms (e.g. 2 years not 1 year 11 months)
- Rebalance will always be done on the second Wednesday of every month
- The rebalancing procedures, which include the recalculation of notional amounts for Spread and Butterfly Trades Indices, shall take place on this day at a specified and consistent time (14:00 GMT)
Full information can be found on the FTSE web site www.FTSE.com under fixed income indices.
Pipeline Capital, LLC