Why Treasury Futures Implied Yield Differs from the On-the-Run Yield

Summary

The document examines why the yield inferred from a Treasury note futures contract can differ from the quoted yield on the on-the-run ten-year Treasury, and asks how futures carry affects DV01 calculations. The response attributes the gap to the difference between the on-the-run bond and the contract’s cheapest-to-deliver bond. A futures contract references a notional bond specification, while delivery is made using an eligible bond adjusted by a conversion factor; therefore, the futures-implied yield reflects the delivery candidate rather than simply the current on-the-run yield.

The example describes a market where yields are below the futures contract’s six-percent reference coupon. The answer says a shorter-maturity, higher-coupon bond may then be cheapest to deliver and may have a higher yield after conversion-factor adjustment than the on-the-run bond. The exchange is brief and does not derive the delivery economics, quantify carry, or establish a general DV01 method. The proposed CTD explanation is useful context, but exact yield and risk calculations require the contract’s eligible bonds, conversion factors, and delivery assumptions.

Key ideas

• The futures-implied yield can differ from the on-the-run yield because the futures contract references its cheapest-to-deliver bond.
• The contract’s reference bond is distinct from the actual bond selected for delivery.
• When yields are below the reference coupon, a shorter, higher-coupon eligible bond may be cheapest to deliver.
• The example does not give a complete method for calculating futures carry or DV01.

Tags

# Yield on Fixed income futures


# Yield on Fixed income futures












I am trying to get a simplified model of the DV01 for the US 10YR Note futures but I cant figure out what the current yield is. When I back out the implied interest rate on the current TYM3 futures contract (as of 3.12.13) I get a YTM of about 2.53, however the current GENERIC 10 Year yield or TNX is only 2.03 or so.

I understand that the 10 year future is referenced off a 6% bond and that the Generic yield is from the current on the run bond. But I am trying to understand why there is such a large difference between the implied futures price yield and the generic yield.

Also, is there cost of carry holding futures contracts? I believe there is, equal to the current yield but I am not sure

## Answer by AbeeCrombie (score 3)

https://quant.stackexchange.com/a/7516

i figured it out. the difference between the Generic Yield and the Futures price implied yield is do to the difference between the current "on the run" 10 year bond the current cheapest to deliver (CTD) bond for the futures contract.

Wow who would have thought figuring out DV01 for a futures contract would be so hard to do.

Since current yields are much lower than Futures 6% reference bond, the CTD will be a shorter maturity higher coupon bond and therefore will have a higher YTM (after conversion factor) vs on the run bond

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.