Why Cheapest-to-Deliver Bonds Change in Treasury Futures

Summary

This discussion explains why the cheapest-to-deliver (CTD) bond in a Treasury futures contract can change. It identifies several drivers: deliverable bonds age out of the basket, newly issued bonds may become cheapest to deliver, and small relative price changes can shift the ranking among bonds with similar economics. In contracts with dense delivery baskets, the CTD can switch among a few close contenders.

The answer cautions against attributing every switch to extreme volatility or aggressive Federal Reserve moves. Volatility and yield-curve changes can affect relative values, but Treasury issuance, bond aging, repo conditions, and the specialness of individual securities also matter. It provides qualitative explanations rather than historical counts, contract-by-contract comparisons, or a quantitative method for predicting switches, so it does not establish how often CTD changes occur.

Key ideas

• A bond can leave a futures delivery basket as it ages, changing which security is cheapest to deliver.
• New Treasury issues can become the cheapest-to-deliver bond in an existing basket.
• When eligible bonds have similar delivery economics, modest relative price changes can switch the CTD ranking.
• Volatility, issuance, yield-curve moves, repo rates, and security specialness can all affect futures basis relationships.

Tags

# ctd change bond future


# ctd change bond future












I do not work in the industry and I don't really have the data to explore that but was wondering if CTD changes happens often in the US bond future market?

Are there particular years where it happened a lot and on which contracts does it happen the most?

Also when it happens is it because there's high vol in the bond market? or the fed is hiking/cutting rates aggressively?

## Answer by user68819 (score 2)

https://quant.stackexchange.com/a/81149

CTD changes do happen from time to time but as opposed to anything to do with switch options etc being excercised, due to very high volatilitly, it's due to more 'boring factors':

- Some of these being the deliverable basket aging with time changing the deliverables into a contract.

- Another being new issues which become the CTD.

- Bonds with similar BNOCs becoming mildly cheaper to deliver.

Generally for most bond futures contracts the notional coupon is quite high say 6%, so the lowest duration bonds tend to be CTD and as they age they will drop out of being eligible to be delivered (point 1).

Certain bond futures such as US (bond) have fairly dense baskets so the CTD may flick between the cheapest two or three bonds.

High vol, changes in Tsy issuance, curve changes etc. All impact the bases. Also repo and specialness are important.

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.