Treasury Bond Futures Quotes and Cheapest-to-Deliver Bonds

Summary

The document explains how to interpret a Treasury bond futures quote when the delivery date, accrued interest, and specific bond to be delivered are not yet known. It says the quoted futures price is grounded in the cheapest-to-deliver principle: among eligible bonds, a rational short is expected to deliver the bond that is least costly to deliver.

Conversion factors help translate eligible bonds of different maturities into comparable delivery terms. The document points to published tables of common factors and recommends further study of cheapest-to-deliver pricing for a fuller account. It does not derive a futures valuation formula or quantify delivery-option effects. Since the actual delivered bond and delivery timing remain uncertain, the quote is tied to delivery economics and the likely CTD bond rather than being a guaranteed final cash price for one predetermined bond.

Key ideas

• Treasury futures quotes are interpreted in relation to eligible deliverable bonds.
• The cheapest-to-deliver bond is the rational seller's expected delivery choice.
• Conversion factors help compare bonds with different maturities for delivery purposes.
• The eventual bond and delivery timing remain uncertain when the futures quote is observed.

Tags

# What is the meaning of the quoted price of a treasure bond future?


# What is the meaning of the quoted price of a treasure bond future?












When looking at treasure bond futures, there's a quoted price.

But upon delivery, the exact time of delivery, the accrued interest, and the delivered bond is unknown, so we cannot know the price we pay for the bond at delivery.

So what is the meaning of the quoted futures price? Is that just some approximation?

## Answer by David Addison (score 1)

https://quant.stackexchange.com/a/38764

The quoted price is based on the cheapest-to-deliver (CTD) criteria. This in turn is based on the premise that a rational seller would only deliver the cheapest bonds which are eligible for delivery. Not doing so would be detrimental to the seller's interest.

The CME Group has tabulated common conversion factors to convert known maturities into an expected bond price. See: http://www.cmegroup.com/trading/interest-rates/calculating-us-treasury-futures-conversion-factors.html

Also, there are many other questions on this network which address pricing of bond futures based on the CTD criteria. I recommend you simply search for "cheapest to deliver" for additional information.

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.