Strips Market Anomalies

Treasury analysts have observed some long-standing anomalies in the Treasury-strip market. These include the following  

Principal strips trade at a premium to coupon strips. Investors 

The final principal strip trades expensive relative to their theoretical values. The shape of the strip yield curve might be expected to be similar to that of the coupon curve, which normally slopes gently upward. However, because investors, as noted previously, prefer principal to coupon strips, final principal strips have greater weight than coupon strips. 

The strips with the longest maturities are the most expensive. As in all well-developed strip markets, Treasury strips having the longest duration and the greatest convexity trade expensive relative to their theoretical values. Conversely, those with intermediate maturities tend to trade cheap to the curve. This is evident from a comparison of the Treasury strip and coupon curves. 

Intermediate maturity coupons are often cheap relative to the curve. Because of client demand for longer maturities, market makers often find themselves with large quantities of intermediate-maturity coupon strips. In the Treasury strip market, three- to eight-year coupon strips have traded cheap to the curve for this reason. 

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