Bridge over ocean
1 July 2017 Financial Analysts Journal Volume 73, Issue 3

History Is Repeating Itself: Get Ready for a Long Dry Spell

  1. Ramzi Ben-Abdallah
  2. Michèle Breton

The recent disappearance of a five-year maturity gap from the set of bonds deliverable to the Chicago Board of Trade Treasury bond futures has resulted in a distinctive configuration, whereby a single T-bond will have the shortest remaining maturity in the delivery basket of bonds for a five-year period. This situation would be inconsequential were three other conditions not simultaneously present, ensuring that this single bond will probably be the cheapest-to-deliver bond over the next five years. We show that a similar alignment of conditions happened in 1994–1999, during the “long dry spell of the 11¼%.” We recall the detrimental repercussions of that dry spell on the bond markets and suggest possible steps to remedy the current situation.

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