So this is a really specific question but I need help calculating the carry on a long TBA trade. Just for example's sake let's say I'm buying FN 3.5s for DEC settle and the roll is currently 4.5 tics. Am I earning carry through MTM PnL on the instrument? I would think that if NOV is at 101 and DEC is at 100-24 and nothing changes then over time DEC should increase toward the NOV price as it becomes the front month TBA.
Basically, is carry PnL from a long TBA position that you roll each month captured through the MTM change in the instrument or do you need to account for the value of rolling the TBA separately?
@Martinghoul can you help with this?
Forward price = Spot Price - cost of carry
We use the term "cost of carry" to represent net interest earned from owning a security over time. Carry has 2 parts a) coupon earned, also called interest b) financing cost, also called repo
You earn 1 day of coupon for every day that you own a bond You pay the repo rate on the spot price of the bond, every day, to finance the long position (lets assume that everybody is in this leveraged..and the long is borrowing money to finance the position, using the bond as collateral for the repo loan)
So, daily cost of carry = one day of the coupon (3.5/365) minus the 1 day repo rate * bond spot price (you borrow money at the repo rate to pay the spot price to own the bond)
GC repo rate is currently about 50 bps....idk what TBA repo rates are...lets assume 100 bps
With repo rates lower than the coupon, this bond carries positive, so the forward price is lower than spot
The forward price is ~5 ticks lower because that's the value of carry for 1 month So yes, you are correct that the Dec forward price should increase to the spot price as you approach the forward date, as the carry differential decreases over time. And yes, you are approximately earning the roll in carry by being long the bond for 1 month.
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