6% data in Bonds - effect

[Robert Bianchi <R.Bianchi@xxxxxxxxx>]

I was a bond portfolio manager in my previous life and we spent alot of our
lives analysing relative value between bond and swap curves. The bottom
line in moving to the 6% coupon bond futures will show a small effect on
the historical data based on the RELATIVE VALUE movement between the 8% and
the 6% bond in historical terms. This is because the 6% coupon bond has a
longer duration (i.e. interst rate risk) than the 8% coupon.  Normally,
these 2 bonds would trade up and down tick for tick apart from the
following conditions:

* slight effects of coupon washing from foreign investors when the 2 bonds
approached coupon payments. This effect would occur roughly every 3 months. 

* relative values between various bonds moved dramatically during the LTCM
crisis. Perhaps the spread between the 8% and 6% moved during this time
period.

* other situations where the big bond houses take positions between the two
(i.e. sell the 6% and buy the 8% yet be duration hedged (or basis point vol
hedged).

If your trading system goes from being a profitable system on the 8% to a
losing system on the new 6% bond, then I would argue that your system is
too senstive and is a huge curve fit. The basic "technical" and
"fundamental" characteristics of the two bonds are the SAME and slight
changes in RELATIVE VALUE between the two should have little or no effect
on a robust trading system. If you feel your system may be effected by this
change, then you should really look at improving the robustness of your
system. 

Robert Bianchi