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Limits of Estimating Treasury Futures Value from the Cheapest-to-Deliver Bond

Article Quant Q&A · Author: TrdX
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Summary

The document proposes estimating a Treasury bond futures price from a selected Treasury bond’s cash price and the conversion factor for the cheapest-to-deliver bond. It suggests dividing the bond price by that factor, then comparing the estimate with the market futures price to look for a relative valuation gap.

The proposal is incomplete as a theoretical pricing method. Treasury futures valuation also depends on financing and accrued interest, and the conversion factor alone does not equate a bond’s cash price with the futures invoice price. The document offers no correlation analysis or empirical evidence, and its final comparison should use consistent contract and bond pricing conventions before being interpreted as overbought or oversold.

Key ideas

  • The proposed estimate divides the selected bond’s price by the cheapest-to-deliver conversion factor.
  • The comparison is between an estimated futures value and the actual futures market price.
  • Conversion factor adjustment alone omits other elements of Treasury futures pricing, including financing and accrued interest.
  • The document provides a proposed calculation but no data or validation of its interpretation.

Tags

Fixed incomeFuturesDerivatives pricing
Full text
# Treasury bonds and Treasury bond futures market price correlation


# Treasury bonds and Treasury bond futures market price correlation












I aim to find the correlation by calculating the theoretical Treasury Bond Future price for a specific Treasury bond instrument and then comparing it to the actual Treasury Bond Future price to determine whether the Future is overbought or oversold.

Step 1: Select a Treasury Bond (e.g., 30Y, 5Y, etc.).

Step 2: Obtain the conversion factor (CF) for the CTD from the CME portal.

Step 3: Calculate the theoretical Future price, which is equal to the spot price of the Treasury bond divided by the CF.

Step 4: Compare the calculated Future price to the actual spot price.

Does that make sense?

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.