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Understanding Non-Cheap-to-Deliver Bond Basis Trades

Article Quant Q&A · Author: user68819
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Summary

The document raises a fixed-income relative-value question about trading a deliverable bond that is not the cheapest to deliver (CTD) against a bond future. The proposed position is long the cash bond and short the future, with the expectation that the bond’s net basis widens. The author asks whether the trade should be understood as a combination of two exposures: the relative value of the non-CTD bond versus the CTD issue, and the basis exposure associated with the futures contract.

No answer or supporting analysis is included, so the document does not confirm the trade rationale or explain how to measure its expected return. It is useful as a framing of the key distinction: a non-CTD bond’s price relationship to the future may involve both its richness or cheapness relative to the CTD and changes in its own basis. The note also recognizes delivery as a practical concern, since the author does not intend to deliver the selected bond. It provides no hedge ratios, carry analysis, financing assumptions, or risk controls.

Key ideas

  • A non-CTD basis position can pair a long cash bond with a short bond future.
  • The trade thesis described is that the non-CTD bond’s net basis widens.
  • The question separates bond relative value versus the CTD from the bond’s futures basis.
  • The document poses the framing but does not provide an answer or validate the strategy.

Tags

Fixed incomeFuturesArbitragePairs trading
Full text
# Bond Basis (non CTD)


# Bond Basis (non CTD)












I had a query regarding the trading of non CTD (but deliverable) basis. Obviously someone can buy non CTD basis (buy cash / sell bond future), with the hopes this widens, clearly I would not want to ever deliver this bond into the future.

Therefore, is the point of the trade that there is a hope that the net basis of this particular bond widens? to me then, there are two angles to the trade: The trade of the non-cheap bond versus the CTD (i.e. the bond RV angle) and then the CTD basis. Just really want confirmation if this line of thinking is correct, as it feels like most of the juice in these trades is not actually in CTD basis but cheap surrounding issues.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.