Strategies for trading futures on a long-term interest rate

Strategy Description
Betting on higher/lower interest rates using a leverage Futures on a bonds basket can be a very effective tool for betting on rising or falling interest rates as these contracts offer quite a good leveraging opportunity.
Yield curve shape strategy Futures on baskets of 2- and 4-year bonds allow market participants to take advantage of changes in the slope of the yield curve. The correlation between prices at different segments of the curve makes this strategy significantly less risky compared to an uncovered short/long futures position. Moreover, it does not involve a risk of moving interest rates as the strategy is based on a spread only. The number of contracts for the short and long segment of the yield curve is inversely proportional to their durations.
Short selling Futures on a bonds basket enable market participants to capitalize from growing interest rates even if they don"t have the underlying bonds in the portfolios.
Hedging a portfolio against a rise in interest rates Investors holding a bonds portfolio can hedge it against increasing interest rates by selling a certain number of futures on the basket of Russian Federation government bonds.
Changing the duration of a bonds portfolio (managing the risk of a parallel shift in the yield curve) Investors holding a bonds portfolio can manage its duration in a very efficient way without having to change the portfolio"s composition itself. Selling a bonds basket futures results in a reduced duration, whereas buying such a futures contract leads to an increased duration. Another advantage of this strategy is that investors can achieve the target duration with a significantly smaller capital due to the leverage effect.
Immunizing a bonds portfolio (hedging against the risk of a non-parallel shift in the yield curve) Futures on fixed interest rates with different maturities help to protect the portfolio against a non-parallel shift in the yield curve. The number of futures contracts required for hedging is calculated for each maturity.
Change portfolio"s asset allocation Futures on a long-term fixed interest rate are a very efficient instrument for recomposing a portfolio without having to actually change the portfolio itself. For example, in order to increase the proportion of stocks in a portfolio and to decrease the share of bonds, you need to buy a futures contract on an equity index (RTS Index futures) and to sell a futures contract on a synthetic federal bond (basket of Russian Federation government bonds).
Hedging against interest rates movements before placement of a bonds issue Issuers who are going to place bonds now have an opportunity to estimate the results of securities placement based on the real rate in the future formed on the derivatives market instead of forecasts of the debt market dynamics made on the placement day. For this purpose the bonds issuer needs to hedge against rising interest rates. The forecast of the futures market is very objective because it represents expectations of all market players.
Hedging a cash flow against falling interest rates Companies who plan to lend their cash on the debt market can hedge against falling interest rates
Buying/selling a short-term synthetic bond (repo trades) The combination of buying bonds and selling a bonds futures creates a position similar to buying synthetic short-term bonds whose term to maturity coincides with the futures" term to settlement. These operations are similar to a reverse repo trade when a market participant lends cash against a pledge of securities. Investors with a portfolio of government bonds may get a short-term loan by selling securities and buying futures. The loan term coincides with the futures" term to settlement. These operations are similar to a direct repo trade when a market participant gets a loan against a pledge of its securities.
Arbitrage between the futures bonds and repo markets Futures on a fixed long-term rate enable market participants to make arbitrage trades between the futures, bonds and repo markets. There are two strategies. The first one is called cash-and-carry arbitrage – buying bonds and selling futures. If the income exceeds the funding cost the market player receives an arbitrage profit. The other strategy is known as a reverse cash-and-carry arbitrage, i.e. selling bonds (short) and buying futures.