As interest in the U.S. Treasury market grows due to increased volatility coming from looming rate decisions and rising uncertainty abroad, we take a look at a measure that is essential to understanding the yield curve – Dollar Value of a Basis Point (or DV01). Every U.S. Treasury product has a DV01, and the values vary across duration. Specific values for each product can be found at CME’s “Invoice Price Calculator” on their website. Generally speaking, DV01 is viewed as the how severely price changes relative to a basis point change in yield. The greater the DV01 value is, the more that that Treasury tends to move.
Pete, our resident futures guy, joins Tom and Tony to talk about the difference between trading shorter-duration Treasuries relative to the Classic Bond, or /ZB, and how to trade DV01-neutral spreads. Pete likes to look at the DV01 number as a way to “quantify basis point move” in Treasury products. The guys characterize 2- and 5-year Treasuries as being a “grind” since they do not move with as much velocity as the Classic Bond. Implied volatilities of shorter-duration Treasuries are also lower than that of the long end of the yield curve. Thus you can reduce risk by trading, say, the 5-year Treasury (/ZF) instead of the Classic Bond (/ZB) since it does not move as many points in price given a change in yield.
If traders have no opinion on the path of interest rates or the direction of Treasury prices, then they can trade the relationships across the yield curve via DV01-neutral pairs trades. The example of the 3-to-1 NOB spread (3 /ZN to 1 /ZB) is used to show how DV01-neutral spreads are a lower volatility alternative to trading U.S. Treasuries outright. Pete trades these spreads when he, “doesn’t care if interest rates go up or down,” but when he just wants to trade, “the relationship between two things.”
Pete proclaims that the point here is to put a measure around duration in the U.S. Treasury curve.
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