Institutional investors betting on yield spread fluctuations between US treasuries are facing ballooning margin costs, new research from derivatives analytics firm OpenGamma reveals.
Rising margin costs – the amount of money traders must deposit when initiating a derivative trade – reflect the challenges facing institutional investors currently engaged in the ‘treasury basis trade’, which involves taking positions in debt markets that seek to profit from changes in yield spreads between US treasuries and interest rate futures.
Alex Knight, head of EMEA, Baton Systems said, “With no sign that the margin costs will reduce any time soon, and interest rates expected to remain elevated above the lows of the previous decade, firms need to ensure that their collateral management processes are optimised, to offer relief on the operational side and to improve the overall economics of the trade.”
According to OpenGamma’s data, the margin for one lot of 2-year listed treasury futures surged from US$330 in November 2020 to US$1,265 as of November 20 2023, a 283% increase.
Similarly, the margin for 10-year treasury futures witnessed an uptick, rising from US$1,540 to US$2,200 in the same time period, a 42% increase.
A key factor contributing to margin costs is the desire to hold cash and utilise treasuries following higher interest rates.
Jo Burnham, risk and margining SME at OpenGamma, said, “Institutional investors now face a more complex landscape as they navigate the trade-off between holding cash and using securities in a market characterised by higher interest rates.”
“As the margin costs for treasury futures continue to rise, traders will likely seek new ways to adapt their approach to maintain profitability in an environment marked by shifting monetary policy dynamics,” Burnham added.
© Markets Media Europe 2023
