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Conversion Factors, Implied Repo, and Bond Futures Calendar Rolls

Article Quant Q&A · Author: pak
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Summary

The document considers a short-front, long-back bond futures calendar roll when both contracts share the same cheapest-to-deliver bond. The trader asks whether a low conversion factor dampens the change in implied repo when the calendar spread widens, and whether physical delivery could avoid realizing the quoted spread loss. The question also compares this intuition with a higher conversion factor.

The response links the back contract’s lower repo rate to greater net carry and a lower forward price for its cheapest-to-deliver bond relative to the front contract. It says this relationship can widen the futures calendar. However, it does not directly verify the proposed conversion-factor explanation or establish that delivery eliminates the mark-to-market loss; the response is brief and tied to a specific contract and market outlook. The discussion offers no calculations or broader evidence, so the delivery and conversion-factor conclusions require independent analysis of contract mechanics, financing, and delivery economics.

Key ideas

  • The question concerns a short-front, long-back calendar roll with a shared cheapest-to-deliver bond.
  • The trader hypothesizes that a low conversion factor reduces how futures spread changes appear in implied repo.
  • The response connects lower back-contract repo rates with greater net carry and a lower forward CTD price.
  • The document does not establish that physical delivery avoids the position’s loss.

Tags

Fixed incomeFuturesCarryRisk management
Full text
# impact of bond futures conversion factor on calendar spread trading


# impact of bond futures conversion factor on calendar spread trading












i have a quick question about conversion factor and his implication in calendar bonds roll trading.

I go short on a calendar roll (short front+long back) which has the same cheapest to deliver. The CF is roughly 0.60 for both contracts. The calendar widen +10cts so it negatively impact my position. I realise that the implied repo is pretty much the same than when i enter in the trade 10cts lower because I reckon that this is related to the low CF as the foward CTD is express as: Future x CF, so variation of front and back futures have a lower impact on underlying CTD.

If the CF of the bond would have been at 0.90, the implied would have move much lower as correlation would have been closer to the future.

is that correct?

On my initial position, can i say that if i go for physical delivery on both front and back contract instead of buying back the calendar, i would not print the -10cts loss but only the difference bewteen the implied repo rate (which is unchanged) and the real repo.

we can then say that a small CF is a "protection" in that situation if we can deliver?

thanks for your inputs on this!

## Answer by VanillaCall (score 0)

https://quant.stackexchange.com/a/47202

You must be referring to the US contract where the CTD is the 2/15/2036. The lower repo rate in the back contract should increase the net carry and thus lower the forward price. As a result, the bond calendar widens because the back contract CTD forward price decreases relative to the front contract CTD price. The repo curve is downwards sloping because the Fed is expected to cut rates two to three more times this year.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.