Dude, where‘s my RV?

Research evidence excerpt

Dude, where‘s my RV?

Barclays | Interest rate derivatives

FIGURE 1. Dislocations in bond markets have collapsed and futures FIGURE 2. The futures basis is relatively compressed, although it is no

basis is compressed longer negative

bp bp

6 150

5 100

-50 1

0 -100

Aug-16 Feb-18 Aug-19 Feb-21 Aug-22 Feb-24 Aug-25 Jun-19 Aug-20 Oct-21 Dec-22 Feb-24 Apr-25 Jun-26

Spline fitting error TU vs OIS

Source: Bloomberg, Barclays Research Source: Barclays Research

One reason that there are fewer RV opportunities in cash bonds is that Treasury and Treasury

repo intermediation capacity has increased (see here). Primary dealers have increased their

cash Treasury holdings expanded their repo books, both of which reduce balance sheet

constraints and result in fewer market dislocations. Further, these positions are hedged in

futures (see here). This increases the short-futures capacity in the market, which cheapens

futures relative to cash, and reduces the futures basis opportunity for leveraged funds.

The compression of traditional bond RV has left leveraged investors with a narrower

opportunity set and has increased the popularity of other strategies with an "RV" flavor. We look

at monthly simulated returns of a range of strategies that are representative of market practice,

going back to the early 2000s. (These returns do not necessarily represent implementable

strategies because they abstract away from issues such as transaction costs, market capacity

and leverage constraints.) Our focus is on correlations, not performance, so we are not

concerned with the most optimal implementations. For 2001 to the current date (period varies

by strategy due to data availability), we investigate:

1. Convergence strategy: A simulated DV01 neutral convergence strategy that approximates