Trading Coupon Swaps Using TBA Futures
From a pricing and execution perspective, trading coupon swaps/spreads of 30-Year UMBS TBA futures will be familiar to users of coupon swaps on OTC markets. The pricing of the swap will be the price of the higher coupon minus the lower coupon. The front leg of the spread, the higher coupon, will dictate whether you are buying the spread.
30-Year UMBS coupon swaps on CME Globex have a minimum price increment of 1/8 of 1/32. They benefit from implied pricing being enabled with outright coupon markets. Futures coupon swaps have ratios of 1:1. They are eligible for margin offsets of up to 65% for adjacent coupons (i.e., 4.5% vs. 5.0%).
Example
Assume you have a short position of 100 contracts ($10M) in the 4.0% for Dec-22. You need to roll out of the short position and into one in the 4.5% coupon for Dec-22. You can do this by selling 100 of the Dec-22 4.5%/4.0% coupon swaps.
Prior to the “3:00 p.m. close” on the afternoon of November 17, 2022, the Dec-22 4.5%/4.0% coupon swap was observed trading on CME Globex with bid price of 2’205 and an offer price of 2’243. On the bid side, 20 of the 45 contracts were implied from other markets, nearly doubling the size of the top of the order book. The implied bid matched the observed bid, and the observed offer was better (lower price) than the implied offer in the spread.
Meanwhile, the Dec-22 4.5% had a bid/offer of 96’165/96’190, and the Dec-22 4.0% had a bid/offer of 93’247/93’280. Later that day, the Dec-22 4.0% and 4.5% coupons settled at prices of 93’262 and 96’185, respectively.
Please refer to Exhibit 1 for the recent markets observed on CME Globex.
Exhibit 1: TBA futures and coupon swap markets on November 17, 2022
Please refer to Exhibit 2 for the breakdown of implied and observed markets in the coupon swap being executed.
Exhibit 2: Breaking down implied and actual markets in the coupon swap of TBA futures
Want to learn more about implied orders? Visit our confluence page here.
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
