Liffe is planning to list two and five year Gilt futures,
possibly by as early as October, depending on feedback from its
Paul MacGregor, director of fixed income derivatives at
Liffe in London, said, however, that no decision had been
reached on whether the two contracts would be launched at the
same time. "We’re close to finalising the contract
design," he said.
Liffe is consulting Gilt-Edged Market Makers (the
government’s bond dealers), potential new market
makers, and end users, including hedge funds, fund users and
The contracts will be physically deliverable, similar to
Liffe’s existing 10 year Gilt futures. Each
shorter dated Gilt will have a basket of deliverable bonds and
the exchange will deliver the cheapest to deliver.
"The 10 year future is doing very well as a product and
people will be using it as a proxy, but as debt issuance grows
in the shorter dated part of the curve, you need to look at
products which match that better for hedging your positions,"
Liffe’s 10 year Gilt futures have been trading
about 100,000 lots a day. Average daily volume was 83,000
contracts in June and 113,000 in May.
"I wouldn’t expect to see volumes that high
initially in shorter dated Gilt futures, but we could see some
reasonable liquidity there, because the amount of outstanding
government debt is at absolutely record levels," MacGregor
The UK is scheduled to issue £220bn ($359bn) of
government bonds in the 2009-2010 fiscal year, compared with
£146.5bn in 2008-2009, according to the UK’s
Debt Management Office.
A total of £74bn of short dated Gilts will be issued,
about 20% more than the £62.8bn last year.
"A lot of this issuance is going on around the five year
range and that is obviously going to deliver straight into a
five year Gilt future, but as it rolls down the curve as well
it will deliver into a two year Gilt future," MacGregor
The five year Gilt contracts will suit those who want to
hedge, because that is where most issuance is. MacGregor said:
"But it might be easier to get liquidity going in a two year
Gilt, because you have the short sterling futures contract
there, which is liquid."
Short sterling is the usual name for Liffe’s
three month sterling Libor futures, which the exchange lists
out to three years.
"A two year Gilt could lean on the very liquid short
sterling futures, because the front strip of the sterling would
act as something for market makers to lean on and they could
sort of hedge themselves. And you would create effectively a UK
sort of Ted spread," MacGregor said.
In the US, the Treasury-Eurodollar (Ted) spread is the
difference between the price of the three month US Treasury
Bill future and the three month Eurodollar contract on dollar
Libor, which have the same expiration months.
Trading the Ted spread, which reflects the riskiness of
commercial banks, is a common practice. n
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