US Rates: Polar Vortex Duration Extension

• The bond basis is a significant concern for investors, as the long end of the curve has been steepening and rates are rising, increasing the probability of shifts in the cheapest deliverable (CTD).
• There are several bonds that are nearly equally cheap, meaning they are not currently the CTD but are close enough to potentially become the CTD. This could impact futures pricing.
• Investors who are long the March bond futures contract can hedge against the risk of CTD duration extension by buying March bond contract puts with a strike price of 118. This can mimic a long basis position.

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