Does anyone know why some desks will quote a bond against the old, off the run Treasury instead of OTR? For instance you will see a high grade quoted at +135/3YR and the 3 year is the old three year. I dont understand the rationalle. Anyone?
There are singificant technicals at hand with the OTR 30 year – its used for hedging, repo, etc. and the off the run treasury is not impacted by these factors, so better measure of true risk free/UST rate for 30 year maturity. Its usually quoted as 130+OLB (old long bond).
What about non-30 year? Like if its priced off of 5 year or 3 year?
I am not 100% sure – but people px using OTR for shorter maturity bonds … i assume there is enough supply of the shorter dated stuff to not be an issue – but i dont know for sure.
It could have something to do with which issue they were initially short when they put the position on. For clearing purposes there is a laundry list of USTs that are fungible for one another. Maybe the position the seller initially put on was shorted against a treasury that isn’t fungible for the current OTR tranches. So the seller of the corp needs to cover his UST short from the initial position and needs a specific issue to do so. Just one possible angle. Also, like charlottekid pointed out, the OTR might be more subject to volatility whimsy. In an IG corp you might be looking at a very small bid-ask spread (only a few bps) so both sides want a clearly defined price convention.
There’s usually a lag between when a new treasury is issued and people start quoting corporate bonds off of it - generally, people won’t roll their quotes to the new bond until the new bond has settled. So if a new 3yr treasury is issued on Wednesday to settle the following Tuesday, between Wednesday and Monday people will still quote things to the old 3yr, switching over on Tuesday. That’s market convention, but as AnalystATL points out there’s no SEC-enforced law here, if a trader wants to quote a bond off a nonstandard reference treasury for some cockamamie reason he can do that. But you don’t have to do business with people like that.