Why Treasury Note Futures Prices Differ from Note Yields

Summary

The document raises a fixed income pricing question: why a nearly expiring 10 year Treasury note futures contract appears to imply a yield different from the yield on recently auctioned notes. The author recognizes that the futures contract assumes a standard 6% coupon, while deliverable notes may carry different coupons, and asks whether the conversion factor explains the difference. The example compares a futures price with an auction yield, but the document provides no answer or supporting analysis.

Key ideas

• A Treasury note futures contract is not equivalent to buying a particular note at its quoted futures price.
• The futures delivery basket and its conversion factors affect how deliverable notes relate to the contract price.
• Comparing an implied futures yield with a single note's yield does not by itself establish an arbitrage.
• The document poses the pricing issue but does not provide a resolution or validate the quoted market data.

Tags

# TNote Futures contract YTM vs yield on bought notes?


# TNote Futures contract YTM vs yield on bought notes?












I understand how to calculate the yield on a 10 yr TNote based on face, price & coupon.

I don’t understand why the yield (and price) on a futures contract about to expire is so different than the market yield (and price) if you buy a note instead.

For example March 21 10 Yr TNote contracts are about 131 which (I think) gives a yield of 2.48% but the notes auctioned last week had a yield of about 1.5%.

I understand the future is based on 6% coupon and e.g. last weeks auction had a coupon of 1.125% but I can’t see how this is reflected in the futures contract price.

If my data is correct(?) I don’t see why you wouldn’t buy the note, sell the future & pocket the difference?

Thanks for any help

Edit 1 = is the answer to be found in the conversion factor that will have the effect of changing the exercise price to something more recognisable per recent note sales?

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