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I'm trying to understand whether a long CTD basis position needs to incorporate slide/roll when computing basis net of carry (BNOC).

I am told the answer is no but I am not sure why. I am well aware of carry as an important consideration in the context of BNOC and one needs to subtract out the pure carry on the CTD, i.e. the coupon income - financing/repo cost to gauge relative value in futures. However, why wouldn't slide/roll also be netted out in the calculation? If you're long the basis and you own the CTD then that bond will generate some rolldown yield or slide on a daily basis (equal to the 1/number of business days until delivery * total roll to delivery date).

Some guesses I have are that the assumption of static yield curve for roll is too limiting and/or long basis traders typically lend out the CTD in repo and in that case they wouldn't earn slide but I don't think this is the answer. Any thoughts?

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  • $\begingroup$ I have similar issues modelling net returns in negative carry environment. It doesn't seem that the slope of the gross basis is enough to compensate for the cost of carry despite having IRP>Act repo. In theory, the negative cost of carry is imputed in the invoice price calculation and therefore in the IRP level. If I take historical data around 110 days before delivery it just seems like a painful thing to hold and potentially only profitable if you are able to take delivery instead of closing out the futures position on market. Pls correct me if im wrong, early days looking at this. $\endgroup$
    – BQn
    Sep 14, 2023 at 20:24

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“understand whether a long CTD basis position needs to incorporate slide/roll when computing basis net of carry”. I’d say (a) yes in order to compute net basis, you have to subtract all economic effects prior to delivery (b) just to be clear, a pure net basis position is not exposed to any roll or slide or anything else that goes on prior to the delivery date.

Also you raise some questions about how basis traders operate. In almost all cases the ctd is funded using repo (otherwise you are using expensive unsecured funding). If overnight repo is used, there is a remaining long rates exposure in the stub period. This is usually hedged with Fed funds or SOFR futures , or by term repoing the CTD. A pure net basis position is obtained only if term repo has been used. Then all you have left unhedged is the long delivery option (ctd switch, wild card, etc).

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  • $\begingroup$ Thanks for your response. Your part (b) point - the question is why? I actually already have an answer but would be curious to see your response before sharing. And yes I am aware one - one of the most common mistakes that investors make is not terming out their repo, in which case they think they're trading the basis and instead exposed to essentially a 3M duration position. $\endgroup$ Aug 2, 2023 at 1:41
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    $\begingroup$ A net basis position is a forward contract on a bond versus a futures contract for the same date. Therefore forward vs forward. The only exposure is if the ctd of the futures contract changes. $\endgroup$
    – dm63
    Aug 2, 2023 at 12:32
  • $\begingroup$ Yes this is basically the answer, the two positions are basically equivalent and the slide component just nets out, leaving with you with the typical basis net of carry factors like CTD switch, positioning, wildcard optionality (if any), etc. Thanks for the response. $\endgroup$ Aug 4, 2023 at 2:59

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