Drivers of Bond Futures Calendar Spreads

Summary

The document introduces a framework for understanding calendar spreads between bond futures maturities. It decomposes a bond futures price into the underlying spot bond price, carry, delivery option value, and relative richness or cheapness. A calendar spread therefore reflects differences between the two contracts across each of these components, rather than being determined by carry alone.

The discussion challenges the idea that low volatility or the disappearance of basis switches makes carry the only relevant driver. It provides this decomposition as a starting point, but the excerpt ends before explaining how each component can be measured or how to trade the spread. It also does not supply empirical examples or establish the direction of a spread trade under particular market conditions.

Key ideas

• A bond futures price reflects spot value, carry, delivery option value, and relative richness or cheapness.
• A calendar spread combines the differences in those components across contract maturities.
• Carry is only one potential driver of a bond futures calendar spread.
• The excerpt offers a conceptual decomposition but no quantitative trading rules or evidence.

Tags

# How to trade interest rate futures calendar spread?


# How to trade interest rate futures calendar spread?












This has always been difficult to understand for me. How is the second futures contract valued in relation to the front month contract? My understanding is there are carry considerations (3 more months of carry for basis) and there is basis switch price involved. However, in a world of prolonged low volatility and low nominal rate levels, basis switch is a thing of the past. So is carry be the main driver for calendar spread? Then assuming the same CTD, a long calendar spread position would be short front month basis and long next futures' basis.

## Answer by Helin (score 8, accepted)

https://quant.stackexchange.com/a/30818

Trading bond futures calendar spread is actually a very involved exercise, with many moving parts. But first things first, recall that bond futures price is approximately: $$ F = \text{spot price} - \text{carry} - \text{delivery option value (DOV)} \pm \text{rich/cheap}.$$ So calendar spreads represent the differences in spot prices, in carries, in delivery options, and in the relative richness/cheapness.

This decomposition gives some clues on what drives calendar spreads:

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.