Treasury Discounting, Repo Financing, and Market Prices
Summary
The discussion asks whether U.S. Treasury cash flows should be discounted using SOFR or a security-specific repo curve. One answer emphasizes that Treasuries are liquid and trade at observable market prices, so practitioners generally do not need to infer those prices by discounting projected cash flows. It also notes that discounting at SOFR can imply a value above the Treasury’s market price, consistent with Treasury swap spreads.
A second answer argues that repo conditions matter when modeling Treasury financing and relative value, especially for a cheapest-to-deliver security as a futures delivery date approaches. These points serve different purposes: market price is the direct reference for valuing a traded Treasury, while repo can be essential to carry, financing, and delivery analysis. The responses do not establish a single universal curve or fully reconcile their framing. The appropriate approach therefore depends on whether the task is describing an observed bond price or modeling its financing and futures-related economics.
Key ideas
- Liquid Treasury securities have directly observable market prices, so cash flows are not ordinarily priced by selecting a discount curve.
- SOFR-discounted values may differ from Treasury market prices, reflected in swap spreads.
- Repo rates affect the financing and carry economics of individual Treasuries.
- Repo assumptions can be especially important when analyzing cheapest-to-deliver securities near futures delivery.
- The relevant pricing treatment depends on the purpose of the analysis.
Tags
Full text
# Repo rate and discount factors # Repo rate and discount factors I'm trying to understand the appropriate discounting methodology for U.S. Treasury securities. While the SOFR curve is often used for discounting SOFR Swaps due to its minimal credit risk, it seems conceptually inconsistent to apply it to certain Treasuries—especially those with specific market features like CTDs can be significant. Would it make more sense to use the bond's repo curve to discount its cash flows and arrive at a price? If not, what is the standard or most widely accepted curve practitioners use to discount U.S. Treasury cash flows? I imagine the choice might depend on the specific Treasury, but I'm looking to understand the general practice. ## Answer by dm63 (score 2) https://quant.stackexchange.com/a/82285 There is no market practice for discounting cash flows of Treasury securities. That is because they are liquid so a price is readily available. By the way if you did discount the cashflows at SOFR you would find a price higher than the market price. Treasuries currently trade at a discount to the SOFR curve (this is called the swap spread ). ## Answer by KT8 (score 1) https://quant.stackexchange.com/a/82284 You are right, you should take into account the repo rate to discount the different Treasuries, and in fact the repo market of Treasuries is quite sensible to the lending and borrowing that such securities experience. So the short answer is yes, you should include the repo contribution in your calculations. You could do the exercise to compute the price of a Treasury using SOFR (or any other rate curve of your choice), and then see what happens when you price a CTD security while delivery dates get closer and closer, there is no reasonable way that you could price that without the repo contribution as the price will stress so much.
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.