ab22 February 2024Global Research and Evidence LabGlobal Rates StrategyMarch/June Treasury RollsRepo reform should boost the real money long/HF short in US and WN going forwardWith mandatory central clearing coming in 2026, we think market participants will be reluctant to do very long repo trades that extend beyond where there is clarity in the structural format of a repo trade. That means real money accounts looking to do the duration overlay trade will need to find avenues other than bond forwards, with WN and US being alternatives. WN: Sell March/Buy JuneValuation and positioning favor June.US: Sell March/Buy JuneWe think the real money long rolling forward will cause June to richen. UXY Sell March/Buy JuneThe large structural real money long/HF short has appeared in UXY, meaning the real money long should start to be a big factor in that roll. TY: Sell March/Buy JuneThe 7yr that gets auctioned next week should be CTD for June, creating uncertainty in valuation and DV01. We think that means positioning will dominate the roll. FV: Sell March/Buy JuneWhile valuation slightly favors March, we think positioning will dominate. TU: Buy March/Sell JuneWhile TU has the same positioning issue as all the other contracts, we expect to see significant noise in valuation as there seem to be a wave of TU/SOFR spread unwinds going through the market. The securities and futures products described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Options, derivative products and futures are not suitable for all investors, and trading in these instruments is considered risky. Past performance is not necessarily indicative of future results.This report has been prepared by UBS Securities LLC. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES, including information on the Quantitative Research Review published by UBS, begin on page 8. Interest RatesAmericasMichael ClohertyStrategist mike.cloherty@ubs.com +1-203-719 4281 Global Rates Strategy 22 February 2024ab 2Global Rates StrategyUBS ResearchWill repo reform impact futures? While mandatory central clearing of futures will not be effective until mid-2026, we think there are immediate effects. Many ALM accounts/real money accounts running against an index use a duration overlay strategy. Instead of buying an off-the-run Treasury in their index, they buy a portfolio of shorter credit and use swaps, futures, total return swaps, or bond forwards to reach their target duration/curve/bucket risk. When accounts do bond forwards, they buy a bond and finance it in term repo. They tend to want to have the term repo leg be as long as possible, because there can be P&L recognition when the repo is reset. Accordingly, 2yr or 3yr repo is typically a desired term. Unfortunately, no one knows what mandatory clearing is going to look like, because the FICC needs to make...
