Adam Parry – Ham rolls, sausage rolls, contract rolls or lobster rolls?

Monday 30th Nov 2020|London

In 1914, George Herbert, the 5th Earl of Carnarvon finally received the concession to dig in a valley on the west bank of the River Nile, opposite the ancient city of Thebes. The Valley of the Kings.

For almost two hundred years archaeologists had been looking for the tombs of the ancient Egyptian Kings and had made some wonderful discoveries, but there were still more treasures to find, and Carnarvon was determined to be the man to do it. He employed a trusted friend to help him out. Howard Carter.

Carter began to work for the Lord back in 1907 to supervise the excavations of noble’s tombs in Deir el-Bahni, near Thebes and would lead the work on this new dig. But the First World War soon put the kibosh on Carnarvon’s plans and it was not until 1917 that Carter happily resumed his excavation work.

Five years later, in 1922, the expedition had found very little and Carnarvon was getting royally fed-up. So much so that he was considered withdrawing his funding. Carter was devastated and managed to squeeze Carnarvon to fund just one more season of work in the Valley.

On his return to the digs, Carter decided to investigate a line of huts that he had abandoned a couple of years earlier and his crew began to clear the huts and the assorted rubbish underneath. In early November, a water boy tripped on a stone, and after being scolded for spilling a few precious drops, Carter suddenly realised that the stone he had tripped over looked like a step.

He was right. It was the top of a flight of steps cut into the bedrock. Carter had the steps dug out until they found the top of an ancient doorway, tamped with hieroglyphs.  Rather than plough on, he sent for Carnarvon, who arrived nearly three weeks later.

On November 26, Carter, with the Lord, his daughter and assistant lurking just behind him, made a tiny hole in the top left hand corner of the doorway using a chisel that had been given to him by his grandmother. A lit candle was handed to him and as he peered through the gap, his eyes widened in wonder.

Impatiently, Carnarvon implored of his minion “Can you see anything?”

With his eye still peering at a cache of gold and ebony, Carter simply replied “Yes, wonderful things!”

Carter had discovered the tomb of King Tutankhamun and a few days later, Carter, Carnarvon and his daughter entered the burial chamber to wonder at the treasures in front of them.

Fast forward 98 years to the final week of November 2020, and once again we have seen some wonderful things.

For stock market investors, we have seen the Dow Jones Industrial Average top the mythical 30,000 level for the first time, and the treasures waiting for those that closed their eyes and bought the market back in April are nearly as great as those for Carnarvon. The S&P also hit a new record high of 3,642 on Tuesday. The NASDAQ closed on Wednesday at a record high is 12,094. Definitely worth opening a glass of bubbly to wash down the Thanksgiving turkey.

Over in Europe, stock markets have underperformed the US, but most indices managed to climb to levels not seen since the record highs set at the end of January. But it’s the corporate market that has been more interesting here. This week we have seen the EU jumping back on the gravy train with a second ESG bond, this time a 15yr. And again, despite not being quite as cheap as the two tranche issue a month ago, the bonds were still trading up over half a point in the grey. The Crossover index, meanwhile, fell to 264bp having been at 375bp at the end of October and at over 700bp in March. That indicates a default probability of a constituent member of 20%, having been at 27% a month ago and 45% in March.

Blah, blah, blah.

I can’t be bothered to continue to bang on about how over-inflated these markets are. So I won’t.

Instead, I’m going to look forward to the first week of December. Time to get the decorations out of the loft and decorate the tree. Actually, now I think about it, I think last year’s tree is still round the back of the shed having never made it to the dump. Not sure I’ll get that past Mrs P, though. Then there is the advent calendar, and not a chocolate one. Oh no. You can now get one with a different type of gin in the run-up to the big day. Fantastic.

And from a market perspective, I urge you to avoid the temptation to just close your eyes and buy anything that moves and try to make some money out of something a little more technical and far less inherently risky.

Rolls. Not ham, cheese or even lobster – recipe alert – but those of a contract variety.

Yes, the first weeks of March, June, September and December sees traders and investors rolling their futures position on the Eurex exchange into the next month.

Normally this just involves taking your outstanding futures position and rolling it onto the next delivery date. For example, if I am long 500 10yr Bund futures for December, I tell my futures broker to sell 500 Bund rolls, which means that I sell the December contract and buy the March.

But there are opportunities to make some risk free cash out of the rolls. Let me illuminate you.

In order to do that, I will go back to the Janet and John explanation of a futures contract. The definition of a futures contract is that it is a legal agreement to sell a particular commodity or security at a predetermined price at a specified time in the future.

For 10yr Bund futures expiring in December, that means that if I buy 100 lots, at the expiry of the contract on December 10, I will be delivered the underlying bond – known as the cheapest-to-deliver or CTD. The amount of bond I will receive is determined by the conversion factor from the future to the cash bond.

The cash price of the bond on delivery date will be equal to the final settlement on the future times the conversion factor.

If I buy before the final settlement at any time during the contracts life span, the equation goes like this:

Cash price = Futures price x conversion factor + gross basis, with the gross basis being the difference between the settlement date of the trade and delivery date.

Got it so far? Good.

Nos the next part throw the repo market into the equation. And that is when we look at something called net basis. Quite simply, the net basis is the gross basis with the actual repo rate to delivery date factored in.

In a normal market, the cheapest to deliver will have a net basis of zero or more likely slightly negative as the market factors in that the repo and the gross basis will converge as we head into delivery. There are occasions when the deliverable basket – a basket of bonds that are eligible for deliverability into the futures contract – has more than one bond that could be the CTD. In that case, the bond which you will be delivered if you run your position to the end of the future is less clear, and that gives us something called optionality. But we won’t delve into that at this juncture.

Provided there is no optionality, we know one thing. That the CTD will hit 0 or less sometime before the delivery date of the future. Therefore if it is positive, we can sell the CTD on a net basis level and we’ll wear diamonds with almost no risk at all. The only real risk comes if a massive market – or curve – move creates some optionality.

In order to sell the net basis, we sell the cash bond and buy the future – this is the gross basis and this is what is traded in the brokers – and then we borrow those bonds in the repo market until the delivery date.

All good?

Right, now let us have a look at the ten year bund contract into December and March next year.

The current CTD IN December on the contrast is the DBR is the DBR0% 15/08/2029. Using a gross basis of 0 and an actual repo rate of -0.5%, we get a net basis of -0.02. So nothing to be done there.

Looking at March contracts, though, Dec CTD is no longer eligible and the CTD is DBR0% 15/02/2030. Using a roll level between the two contracts of -240 – Dec at 175.40 and March at 177.80 – and a repo to March of -0.5%, we get a net basis of +0.04. With no optionality into March either, that effectively gives us a risk-free profit. Admittedly, you need quite a big position – EUR100m will net you EUR 40,000 – and you might tie-up the balance sheet for a couple of months, but it is treasure. Carnarvon and Carter would be proud.

So there you go. You can look at Schatz, Obls, BTPs and OATs on Eurex with exactly the same methodology. Gilts and Treasuries have a slightly different deliverability method but the techniques are effectively the same.

Feel free to contact us if you have any questions.

Onto that lobster roll, and here is a recipe inspired by a visit to Gramercy Tavern in New York.

First make the rolls. For 5 rolls take 250g plain flour, 100g water, 50g of your sourdough starter – see our first blog – 37g egg yolks, 8g yeast, 4g salt, 12g milk powder and 10g sugar and put in a mixer with a dough hook. Knead for 5 mins at a low speed and then 7 minutes on high speed. Add 25g softened butter and 25g sunflower oil and knead for a further 3 mins. Shape into s ball, cover with a damp cloth and leave to rise for an hour.

Divide the dough into 5 balls and leave to prove for another couple of hours. Place on a baking sheet and into an oven at 170c for about 14 minutes. Just before putting the rolls in, pour some water onto a hot baking sheet in the over to create steam. Remove the buns from the oven, turn them out and leave to cool on a wire rack.

Take a live 500g lobster and put it in the freezer so it goes to sleep. Dispatch the beast and remove the claws and tail. Plunge into a large pan of boiling water, then reduce the heat and simmer for 9 mins. Once cooled, remove the meat and chop into bit size chunks. Mix with Marie Rose sauce – mayo, ketchup, tabasco and Worcestershire sauce to your taste.

Cut your roll down the centre like a hot dog roll. Put a little gem lettuce leaf on the roll and top generously with the lobster mixture.

Enjoy and have a great week.

On the Agenda this week:



  • Monday: Chicago PMI; Dallas Fed.
  • Tuesday: ISM.
  • Wednesday: ADP Employment
  • Thursday: Initial Jobless Claims; Markit Svcs PMI.
  • Friday: Employment Report; NFPs expected at 500k; rate at 6.8%; Factory Orders; Durable Goods.


  • Monday; German CPI; Italian CPI.
  • Tuesday: Italian GDP; Area Wide CPI.
  • Wednesday: German Retail Sales; Area Wide, Spanish and Italian Unemployment.
  • Thursday: Markit PMIs; Area Wide Retail Sales.
  • Friday: German Factory Orders; Italian Retail Sales.


  • Monday: M4 Money Supply.
  • Tuesday: Nationwide House Prices; Mfg PMI.
  • Thursday: Svcs PMI.
  • Friday: Comp PMI.

Central Banks:


  • Tuesday: Powell testimony before the Senate Banking Committee at 3pm.
  • Wednesday: Powell testimony before the HoR Financial Services Committee at 3pm;  Beige Book at 7pm.


  • Monday: Lagarde at Eurogroup Meeting.
  • Tuesday: de Guindos at Ecofin meeting.
  • Wednesday: ECB non-monetary policy meeting in Frankfurt.
  • Thursday: General Council meeting of the ECB in Frankfurt.

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