History Is Repeating Itself: Get Ready for a Long Dry Spell

Ramzi Ben-Abdallah and Michèle Breton

Financial Analysts Journal, 2017, vol. 73, issue 3, 106-130

Abstract: The recent disappearance of a five-year maturity gap from the set of bonds deliverable to the Chicago Board of Trade Treasury bond futures has resulted in a distinctive configuration, whereby a single T-bond will have the shortest remaining maturity in the delivery basket of bonds for a five-year period. This situation would be inconsequential were three other conditions not simultaneously present, ensuring that this single bond will probably be the cheapest-to-deliver bond over the next five years. We show that a similar alignment of conditions happened in 1994–1999, during the “long dry spell of the 11¼%.” We recall the detrimental repercussions of that dry spell on the bond markets and suggest possible steps to remedy the current situation. Disclosure: The authors report no conflicts of interest. Editor’s Note Submitted 7 January 2016 Accepted 28 December 2016 by Stephen J. Brown

Date: 2017
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DOI: 10.2469/faj.v73.n3.1

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