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I have a question on EUROZONE Bonds and in particular repo accrual and bond accrual.

On a Thursday if we are Short EUROZONE bonds (which have a T+2 settlement lag) in a portfolio (and assuming no move in yields), there is an exaggeration in pull 2 par and hence the P&L on a Thursday will be a lot lower than on any other given day (assume short bonds and bonds trading at a discount to par). I have a Trader who is experiencing this - his Thursdays are always worse because of this phenomena.

Now what about Bond Accruals and Rep financing accruals. I would assume the Bond Coupon Accrual would also have an extra 2 days worth of accrual on a Thursday for EUR Bonds - Is that correct?

And For Repos - is that still the case? Our PM feels the reverse repos should have the extra 2 days worth of positive financing on a Thursday to offset the pull 2 par to a degree - but the system accrues the extra 2 days on a Friday - This up / down between days increases vol and dampens his Sharpe Ratio!

Does anyone have any thoughts on this and what it would be in the real world / how to treat from an accounting point of view?

Thanks so much! VS

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Yes your trader is right. Of course you cannot lose money on a Thursday and get it back on a Friday everyweek.

Consider being short a bond and long of cash on a Monday (with bond settlement on Wednesday). You might have 100mm Eur in cash as of Monday and the bond dirty price is 100.025. You might suggest that this means the trader's portfolio is negatively valued because he needs 100.025mm Eur to close the bond on settlement on Wednesday. But by Wednesday that 100mm in EUR will grow (through repo interest at 5%) to be equal to 100.025mm so the value of the portfolio is actually NPV'ed to the present day to zero.

Similarly if it is a Thursday and the bond settles on Monday then the price might be 100.05 and thus it optically appears the portfolio has even lower value. But now the cash will accrue repo interest for 4 days until Monday at 5% and grow to 100.05mm thus the portfolios value is again zero.

If you discount every cashflow correctly and assign bond prices to the days they are due to settle this up and down pnl will not occur.

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  • $\begingroup$ Thanks very much, but what if we are using accrual accounting as opposed to discounting future cash flows. Should we be accruing those extra 2 days in leui of the weekend on a thursday or friday given t+2 settlement? My colleague mentioned additional repo interest needs to sit on the Friday not Thursday... $\endgroup$
    – V S
    Commented Oct 15, 2023 at 8:39
  • $\begingroup$ I don't know the exact mathematical specifics of your accounting systems. All I can state is if you are getting PnL offsets on Thursday and Friday you are doing something wrong. Either measuring the bond valuation incorrectly, the value of the repo incorrectly, or both. $\endgroup$
    – Attack68 ♦
    Commented Oct 15, 2023 at 10:32
  • $\begingroup$ Thanks Attack, yeah Ive got the Trader saying what youre saying and others saying that we are artificially smoothing pnl. Fun stuff..! $\endgroup$
    – V S
    Commented Oct 15, 2023 at 10:55
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    $\begingroup$ Actually no, by doing what you are doing you are artificially introducing PnL volatility that is not real. Smooth PnL would be the correct, natural state. $\endgroup$
    – Attack68 ♦
    Commented Nov 13, 2023 at 16:45
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    $\begingroup$ Thanks we actually moved all that repo pl to Thursday which smoothed it out $\endgroup$
    – V S
    Commented Nov 14, 2023 at 17:45

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