Treasury Futures CTDs and the 2s10s Curve Trade

Summary

The discussion explains how the cheapest-to-deliver bond can make a Treasury futures curve trade differ from the yield spread suggested by the contract names. A 10-year Treasury note future may be priced around a deliverable bond with a maturity closer to seven years, because its delivery basket permits bonds with remaining maturities from six and a half to ten years. A position using the 2-year and 10-year note futures may therefore express exposure closer to the two- and seven-year points than to a pure two- versus ten-year yield spread.

The answer suggests the Ultra 10-year future as a closer maturity match, since its minimum remaining maturity is nine years and five months. That contract has a narrower deliverable pool than the standard 10-year future, which can affect delivery options and basis behavior. The explanation is a simplified maturity comparison; actual exposure depends on the deliverable basket, CTD selection, conversion factors, and changing market conditions.

Key ideas

• The cheapest-to-deliver bond determines much of a Treasury futures contract’s yield exposure.
• The standard 10-year note future permits delivery of bonds with remaining maturities from six and a half to ten years.
• A 2s10s position built with standard note futures may behave more like a two- versus seven-year spread when the 10-year future’s CTD is near seven years.
• The Ultra 10-year future has a higher minimum deliverable maturity and may better match the ten-year point.
• A narrower delivery basket can alter contract characteristics, and actual exposure depends on the CTD and futures basis.

Tags

# Answer by oronimbus (score 2)


# How does one put on a 2s10s trade using 2 and 10 year treasury futures contracts when the CTDs are not 2 and 10 year bonds?












The CME describes how to put on a 2s10s trade in this screenshot:

https://i.sstatic.net/2yPzW.jpg

Looking at current 2 and 10 year futures the CTD is roughly a 2 year and 7 year respectively.

Am I right in saying that using the current 2 and 10 year futures to put on a 2s10s trade, you're actually not capturing the spread between the 2 year yield and the 10 year yield? It's more the 2 and 7 year yield spread?

## Answer by oronimbus (score 2)

https://quant.stackexchange.com/a/73677

According to the contract specs of the 10 Year Treasury Note ("TY") future, you can deliver any UST

> with a remaining term to maturity of at least six and a half years, but not more than 10 years, from the first day of the delivery month.

So yes, TY is typically closer to a 7 year UST than a 10 year.

Perhaps you can look at UXY, the 10y Ultra Future, which is closer to 10 years with a minimum remaining maturity of 9 years and 5 months.

The pool of deliverable bonds for TY (currently around 18) is much wider than for UXY (currently 2).

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.