How Bond Futures Reflect Carry, Roll-Down, and Duration
Summary
The document asks how a bond futures carry measure can make sense when a futures holder does not directly receive the underlying bond’s coupons or pay its repo funding. The cited index description ranks eligible government bond futures by estimated carry, goes long the higher-ranked group, and shorts the lower-ranked group. Its measure is based on the cheapest-to-deliver bond’s yield, funding cost, and estimated roll-down return, with a distinct averaging treatment for Australian futures.
The answer explains that rates returns have carry, roll-down, and duration components, and argues that futures pricing incorporates all three, including implied funding costs. Thus, futures returns can reflect more than changes in duration exposure alone, especially when the yield curve is steep. As a practical check, it suggests comparing a calculated monthly bond return series with a bond futures excess-return index. The document offers this as an empirical verification idea, not a worked calculation. It does not specify the precise futures pricing and delivery mechanics or present comparison results, so the explanation remains conceptual.
Key ideas
- Bond return analysis can separate carry, roll-down, and duration effects.
- A bond futures position can reflect all three components through futures pricing.
- Implied funding costs matter to the futures return even when the holder does not directly fund a bond.
- A steep yield curve can make a bond future a poor proxy for a bond return at the same maturity.
- Comparing calculated rates returns with futures excess returns is suggested as a practical check.
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Full text
# What do bloomberg mean by this carry measure? # What do bloomberg mean by this carry measure? https://assets.bbhub.io/professional/sites/10/Bloomberg-GSAM-Bond-Futures-Carry-Index-Fact-Sheet.pdf On page two, they say > SELECTION & REBALANCE On a monthly basis, the carry measure for each of the eligible constituents (underlying government bond futures) is calculated and the constituents are ranked in descending order in terms of their carry measure. The index takes long positions in the top 1/3rd constituents with the highest carry and short positions in the 1/3rd constituents with the lowest. SIGNAL DESCRIPTION The carry measure reflects the expected return of the bond futures, assuming yield curves do not change over the following month. For all bond futures, except for the Australia bond futures, the carry measure is defined to be the yield of the relevant Cheapest-to-Deliver (CTD) bond minus the relevant funding rate plus the CTD bond's roll down return (estimated to be the product of its modified duration and a linearly interpolated measure of the localized slope of an appropriate section of the yield curve), divided by 12. For Australia specifically, the yield and modified duration of the CTD bond is replaced by the average yield and average modified duration of all deliverable bonds. I understand that somebody who buys a bond and funds it with a repo, earns the bond's carry, minus the funding rate. However, they are talking about bond futures... surely the bond futures holder doesn't earn any of this? You just get the bond at maturity for the futures price F - you certainly don't get any of the coupons and you're not paying the funding rate either? So what do they mean by this carry strategy? ## Answer by ronmama (score 1) https://quant.stackexchange.com/a/82373 @elypticla - I guess you have already figured out the answer to this question. just my 2 cents (might help others reading this). Rates return has 3 significant components (carry + roll-down + duration). For a while, I too thought that the bond futures return only captures the duration component. But that will be erroneous, especially, when the yield curve is sufficiently steep. In such a case, a 10y bond future will never be a good proxy/hedge for 10y bond returns. As @nbbo2 has suggested in his response, bond futures inherently capture these 3 components in its pricing (incl. the implied funding cost or repo as you mentioned). The most practical way to verify this will be to gather some rates data (3m funding, 5Y, 10Y) to calculate 10y monthly rates return (carry + roll-down + duration). Then use the S&P 10y bond futures excess returns index available on their website. Comparing results will suggest that both the series track each other well. Let me know if you need more details on this.
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