The Futures Bond Basis, Second Edition

PREFACE

This book is aimed at all those with an involvement in cash bond and bond futures markets. This includes traders and salespersons in investment banks, as well as fund managers. Others such as post-graduate students in finance may also find the contents useful. The first edition of this book was a (hopefully!) succinct and accessible look at the government bond futures basis. The concept of the basis can be applied in any financial market, not just that of government bonds, and refers essentially to the price differential between cash and derivative (or synthetic) versions of the same asset. The second edition of the book builds on this and also introduces more background on futures contracts as well as more illustrations. The expanded approach should help to answer the question of ‘What exactly is the basis?’ and ‘How does one trade the basis?’. We also introduce in this edition an accessible account of the Z-spread, which is a bond yield spread used in relative value analysis. This is becoming increasingly relevant in an era of credit derivative basis trading, which, however, must remain the preserve of another book. Government bond markets do not exist in isolation, and while there are certainly dedicated desks of traders in banks whose sole job it is to trade the government basis, some of our readers will be interested in the interaction between risk-free and credit-risky markets. But we remain true to our original purpose, hence we place the introduction to bond spreads ...