What participants are the driving force of price discovery in govt. debt instruments?

I do understand, when it comes to an underlying and it’s associated derivative instruments, that it is the market for the underlying itself that is the bottom line in setting price. The derivative instrument is at the mercy of the more dominant force. For example, the S&P’s value is dominated by the market of it’s components. ES then can only attempt to track it’s underlying. In other words, I doubt the movements resulting from participants trading ES can actually start driving what the S&P does in the long run. (Although if anyone wants to argue that point I would interested)

The relationship between underlyings like treasuries or bunds with the periodic auctions for those instruments would be different. Since the futures markets for these products are so liquid and of course open daily, it seems this would be the market more able to run effective price discovery. I would then expect the actual participants in the auctions for these debt instruments to take their ques from the futures market. In this case, the derivative is driving the price of the underlying…

What do you folks think?

I think you need to check what you’re smoking.

“I doubt the movements resulting from participants trading ES can actually start driving what the S&P does in the long run. (Although if anyone wants to argue that point I would interested)”

@galli… I don’t understand your point. What in that statement is so outrageous?

My brain short circuited when I read this. Is this related to trading somehow?

Not my trading anyway. I’m just curious about price discovery. In a market like oil or gold, the prices derived in the futures market end up defining the actual price for the commodity. When it comes to something like the market for S&P futures (ES) Vs. the S&P itself, both are results of high volume liquid markets constantly pricing in/ processing material information. I would sometimes ask myself who is driving who? What if the participants in ES become way more enthusiastic than the participants in the underlying equities markets. Who is right? Who backs off or catches up? I would think it is ES that has to follow because essentially, it is the spot price of SPX that will determine if your contract wins or loses.

With the treasuries market, the actual auctions or cash transaction to buy or sell these products are low volume and infrequent. Meanwhile the futures market is continuously pricing in material information around the clock. Seems like there is no contest there as to who is right when it comes to what the price of a treasury bond should be. I wonder if the price the futures market comes up with is something that influences the auctions for treasuries.

I have noticed in the Bund, at least, that when there is an auction for these instruments, the results do not effect the intraday trading since the outcome is already in confluence with the market.

Go read Liar’s Poker and report back when you are done.

What? Liar’s Poker is about the 80s junk bond market. That has nothing to do with what I’m talking about.

I miss Bchad. sad

The European Securities and Markets Authority (ESMA) does reckon that buying/selling Credit Default Swaps market participants can indeed affect the credit bond market and thus engage in market abuse. Not sure it is possible in money markets.

There is a portion of the book that discusses how treasuries arbitrage used to exist but was traded away by market participants. Futures can drive spot prices of the asset, and the other way can also happen. It is an elemental market dynamic that is not unique to any asset class.

It would help, I think, if you could cut down the sentences you write by 60%. You make people’s brains explode because you fill the content with basically rambling.

Alright Ohai, sounds good. I wanted to read Liar’s poker anyway. Sounds entertaining. *skip to end*

About the “rambling”…I’m a big picture contextual thinker. I never see parts, I see the whole. So, when I go to explain or ask something it is hard for me to express myself without also providing the context of “whole” from which this “part” came from. In this case I could have just come out and said, “hey, does ZN drive the price of 10 year bonds or do the auctions set the price?”… and I would have gotten the no frills answer that you gave me.

However, I don’t find that answer very satisfying because this whole thread is only one part of a larger project going on in my brain that wants to understand how markets work, what creates efficient price discovery, how do all the parts works together and what parts are dysfunctional. I was hoping my “rambling” would inspire more in depth tangents related to that context.

*for Ohai* … I ramble to inspire discussion rather than one line answers.

women amiright6?

I thought the question was good and clearly worded. Shrug. Anyhow, there is a lot of volume in ES, and it’s always trading (during Asia hours, and US holidays), so I would think it a big deal for price discovery?

USG securities are weird, with them buying their own crap and all. Hmm well actually, now governments around the world are buying their own stocks, and the data providers are manipulating the statistics, and the news is manipulating reality. I guess in the “post-truth” age, the controlling parties just make the price be “discovered” at whatever price they want…

well, my thinking is that the futures market is large enough and the collection of participants is diverse enough that it makes a divergence from intrinsic value more difficult. Seems like too me that a healthy futures market has the power to stabilize the market as a whole.

Well the ECB and Japan’s central bank are also buying a shit load of Government bonds, precisely for the purpose of pushing down yields.

So I agree that price discovery for government securities is certainly subject to “unconventional forces”.

But then, which asset class isn’t ? Is a P/E of 18 today the same as a P/E of 18 10 years ago ? What about R/E prices ?

Good point. I was initially just thinking of monetary policy and interest rate decisions as part of the fundamental picture that market had to digest. However, you are right, monetary policy is not just a statement but an action. Market is not “discovering”. It is being told! …and I don’t see a futures market trying to force rates away from levels that don’t neccessarily reflect economic fundamentals. I suppose the futures market follows the cash market after all. Thats interesting…

This is the strangest thread i’ve read on AF. Futures and spot are the same market,one just occurs later with different obligations. Any differences between the two can almost be solely be explained by interest rates and collateral obligations. Spot changes futures the same way that futures change spot. Any difference between the two is arb’d out overtime, if not immediately (sometimes without a trade).

I think your deeper question is asking what determines intrinsic value which is not the same as wondering if derivatives determine spot prices.

a simple way to do this is to get the total volume in 1 day / total issued bonds.

505 B https://www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo5.htm

18T https://www.statista.com/statistics/189302/trading-volume-of-us-treasury-securities-since-1990/

505/18000 = 2.8%

Boom. So 2.8% of the owners determine the price of a bond.

Propaganda and government manipulation! laugh

you are right about the futures/ forward market. treasury futures are very liquid as is (through 10yr)… but continuous (price discovery) as you call it depends a lot on relationships to other markets… ECB meetings or Germany bond auctions (example) do move the US curve on days without US auction and in between its just noise really outside other cross asset correlations… presumably there are BIG players that trade out arbitrage through algorithms everyone else is just following on an intraday basis