Analysing and Interpreting the Yield Curve, 2nd Edition

CHAPTER 13Identifying Relative Value in the US Treasury Market: Acquiring New Benchmark Definitions from an Ancillary Yield Curve¹

In the US, there have been numerous attempts to derive a benchmark yield curve from subsets of available sovereign bonds such as the US Treasury Quotes published daily. Typically obvious non‐liquid instruments are avoided in an attempt to converge to an extraction on the remaining relatively large list of securities, which is termed a “benchmark” curve. In a real sense this is a problem which has no clear solution that nevertheless must be “solved” so that business can be conducted! Previously we have developed an optimisation method with which we have obtained a benchmark yield curve from its application to all US Treasury bills, notes, and bonds published in the Wall Street Journal, roughly 339 in total. But for practitioner application we have sought smaller collections than this entire list. Looking for a curve that would coalesce with the benchmark curve, we have performed an extraction on all T‐bills and a subset of notes and bonds for a yield curve termed “ancillary” which coalesces with the aforementioned benchmark curve and which is more accurate with respect to recovering internal rate of returns closer to the published Ask Yields, which are the published Bond Equivalent Yields for the US Treasury bills. In contrast to what has been termed “benchmark securities”, for example, 2YR, 5YR, 10YR, 25YR, and so on, these new ancillary securities ...