Which would is likely to generate better returns over the long-term, being long 10Y UST futures (collaterized by 100% of the contract value with 2y UST bonds) or buying IEF?
Assume the duration of them are the same
I would imagine the futures are better as the rollover cost (plus libor financing) is more than offset by the extra yield of the 2 year notes

How well do you know about treasury futures? Treasury futures are complex and dynamic. As of today's close, the CTD note is 2% 7/31/2022, which yields 1.73% and has a duration of 6.5 and IEF's portfolio yields 1.95% and a has a duration of 7.67 years. However, the gross basis the close was 11.79 32nds (and changes daily), whereas we would expect to earn 16.18 (=2% * 91 / 360 * 100 * 32) 32nds of accrued interest to 12/31 expiration. Why are futures "expensive" according to the basis, frankly, I don't know, but my guess would be it has to do with future yield expectations and how that may affect the CTD note.

What do you mean rollover cost and libor financing? Are you buying the 2 years on margin?

Hopefully somebody else replies here, because I'm willing to learn more myself.

Rollover cost means well, the cost of rolling over the futures to the next expiration over and over again as it gets closer to its own expitation. libor financing is the premium futures contract have over the cash market

2years will be bought with cash only

Isn't this negligible, especially with roll markets?

Can you explain the mechanics of this process in detail? Sorry for the noob question, I just don't know if I'm understanding it properly and then one step further how the math works out.

First, you're purchasing the most recently issued 2yr treasuries (floating or fixed rate note?).

Then you're borrowing cash using the 2yr position as collateral?

And then using that cash to either purchase 10yr futures or a similar bond etf IE?

Is that correct or am I off somewhere?

How do you calculate rollover cost? Just the slippage of rolling from Dec to Mar for example?

Won't IEF have rollover cost as well? Or is it a frequency thing...rolling 4 times a year in the future (doing it yourself) vs IEF rolling its position more slowly as their basket of treasuries matures and new issues fall within their target range.

And lastly, how would you rollover your futures position if you had one on? Are you directing an administrator to do it or would you be doing it yourself legging in the outrights or trading in the cal spread markets?

I am guessing most of the time the futures will track the CTD underlying pretty well, unless
1) the arbs are having difficulty financing the arbitrage when liquidity is scarce
2) macro traders usually trade using futures and they put on a huge bet in one direction and its tough for the arbs to keep up
3) difficulty in locating the CTD bond to short

If you are holding long term and ignoring tax considerations, 10y futures is better if you plan to leverage your portfolio as it is likely the cheapest source of margin for most retail investors. If you are investing for the long term on a cash basis, then IEF is probably better as it is more simple and has a lower cost.

So far I had three people who admit they don't know the answer to give their take on the answer, lol