Why Bond Futures Can Trade Above the Cash Bond Price

Summary

This exchange asks why a German government bond future can have a quoted price far above the price of a cash government bond. The question considers yield-curve expectations, quotation conventions, and carry, and wonders whether coupon payments should make the future cheaper. The reply offers a contract-specification explanation: the Bund future references a notional bond with a specified coupon, while the deliverable bond may have a different, lower coupon. Comparing the future’s quoted price directly with one cash bond therefore does not compare identical instruments.

The discussion points to the delivery basket and its cheapest-to-deliver bond as relevant to interpreting the futures contract. It is only a brief explanation, however; it gives no conversion-factor calculation, delivery-option analysis, or full cash-and-carry valuation. The quoted price gap alone is not enough to infer expected yields or carry, and the reply’s specific bond details are presented tentatively.

Key ideas

• A bond future can reference a notional bond whose coupon differs from that of a cash bond.
• The futures quote should not be directly compared with one deliverable bond as if they were identical securities.
• The cheapest-to-deliver bond and the contract’s conversion factor help explain futures pricing.
• The exchange offers a tentative explanation without a complete valuation or delivery analysis.

Tags

# Price difference between bond cash and futures


# Price difference between bond cash and futures












I used to trade German and US govt. bond futures and I am now having trouble understanding the price difference of these markets against the cash market. For example, the 10 year german government bund cash is trading at 101.19 while the front month future is at 144.86. To my mind the difference can't be attributed to expectations of changes in the yield curve or any quotation convensions to do with bond prices I can only think it is a carry cost but would have thought the coupon would cause the futures to trade lower than the cash. Any ideas? Thanks

## Answer by vanguard2k (score 7)

https://quant.stackexchange.com/a/4785

I think the reason is the following: The bund future refers to the price of a fictituous $10$-year $6\%$ coupon bond. The current ctd bond has a smaller coupon I think ($2\%$ 01/04/2022) - that would account for the price difference right?

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