Why Treasury Futures Net Basis Can Turn Negative
Summary
The document explains the net basis in a Treasury cash bond and futures trade, addressing why it may be negative even though it is associated with delivery options. A negative reading does not by itself establish an arbitrage opportunity: funding constraints and delivery-market risks can affect the basis.
It identifies scarce or costly repo financing, including the cash needed for a repo haircut, as a reason the basis became negative during the 2008 financial crisis. Attempts to corner the cheapest-to-deliver bond by withholding it from repo lending can also deter investors who fear failing to deliver. To interpret the basis, compare the bond price with the futures price adjusted by its conversion factor and account for coupon, accrued interest, and funding through futures maturity. The discussion is brief and does not provide a pricing example or quantify these effects; it also notes embedded delivery options that a fuller analysis must consider.
Key ideas
- A negative Treasury futures net basis can reflect financing stress rather than a simple arbitrage opportunity.
- Repo access and the cash required for a financing haircut can influence the basis.
- Withholding the cheapest-to-deliver bond from repo lending can raise delivery-failure concerns.
- A basis comparison should adjust the futures price by the bond’s conversion factor and include coupon, accrued interest, and funding.
- Embedded delivery options complicate interpretation of the basis.
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Full text
# treasury bond cash future net basis # treasury bond cash future net basis In the cash bond and future basis trade, the net basis is like the option (quality option and time option) premium, right? So, it should be positive. Sometimes I see it went to negative, so does this mean an arbitrage opportunity? Thanks ## Answer by dm63 (score 3) https://quant.stackexchange.com/a/49275 Reasons why the net basis might trade negative from time to time : 1) if a credit crisis occurs, investors do not have the resources to invest in the basis. For example , banks are unwilling or unable to provide repo financing. Or, investors do not have the cash required for the haircut on the repo financing. Hence the basis traded negative during the 2008 financial crisis. 2) there have been instances in the past (pre-2008) when some investors (possibly illegally) try to corner the market in the ctd, for example by refusing to lend it into the repo market. This can result in investors being scared to hold the basis , since there is an onerous penalty for failing to make delivery into the futures contract. ## Answer by AlRacoon (score 0) https://quant.stackexchange.com/a/48787 Ignoring the embedded optionality (CTD option, wild card option, etc) the basis is the cost of funding the position. Of course one would need to account for the coupon and the accrued interest to the maturity date of the future, as well as that of the underlying deliverable bond. Also, one would need to adjust the futures price by multiplying by the conversion factor to compare the futures price to the underlying deliverable bond. The CME has a good publication that explains how all of the components about are tied to the basis. It can be found here: https://www.cmegroup.com/education/files/treasury-futures-basis-spreads.pdf
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.