Eurex: Launch Of Inter-Product Spreads For Fixed Income Futures

Inter-Product Spreads for Fixed Income Futures

16 September: Launch of Inter-Product Spreads (IPS) for Fixed Income Futures

As of 16 September 2019, Eurex will offer Inter-Product Spreads (IPS) for fixed income futures as a standardized futures product.

Inter-Product Spreads are strategies used to create exposure to changes in flatness and steepness of the yield curve, such as a Bund-Buxl spread or outright spreads between European government bond futures such as the BTP-Bund spread.

By standardizing these spreads into a dedicated order book, Eurex creates a delta neutral (DV01 neutral) trading opportunity by using appropriate leg ratios. As the spread is traded in a single transaction, it also eliminates legging risk and saves bid-ask spread costs. Once the IPS is processed, the individual legs can be traded out in their respective order books.

Trading the government bond yield curve

Trading the sovereign yield spread

The yield curve for German government bond debt has changed its slope and shape over the course of time.
Starting with a flattish structure in 2006, the steepness of the yield curve increased when the ECB reduced short-term rates in the wake of the financial crisis.
Buy-side investors and proprietary trading firms actively trade these price relationships and moves.
An IPS will let them anticipate yield changes at various points of the yield curve or hedge against a parallel shift of the yield curve, all without any legging risk.

In the early 2000s, the yields of Eurozone currency members’ sovereign debt converged to German yield levels.
The financial crisis accentuated the divergence of valuations and credit worthiness as European sovereign debt issuers differed in the response to the subprime crisis.
An IPS allows investors to trade the spread between government bond futures of different countries in a delta (DV01) neutral fashion in a dedicated order book, without any legging risk.

Contracts and Ratios

From 16 September 2019, the following Fixed Income Futures combinations are available as Eurex Inter-Product Spreads:

Inter-Product Spread Strategy	Instrument Name	DV01 neutral leg ratio	IPS ratio of leg instruments
Bund-Buxl Spread	IPLX	2.68	5:2
Long-term BTP-Bund Spread	IPPL	1.50	3:2
Schatz-Short-term BTP Spread	IPS2	1.05	1:1

The above IPS leg ratios are valid for the December 2019 expiry. Final ratios will always be confirmed before each new expiry starts trading.