Treasury Bond Futures

Discussion in 'P1.T3. Financial Markets & Products (30%)' started by optionshedge, Oct 7, 2009.

  1. optionshedge

    optionshedge New Member


    I have a few questions regarding Treasury Bond futures.

    I understand that every bond that is eligible for delivery into a Treasury futures contract has a conversion factor, where the conversion factor is the approximate price at which $1 par of a security would trade if it had a 6% YTM.

    1) Does the conversion factor for a specific bond change over time? If so, what factors cause the conversion factor to change for a specific issue?

    2) If all bonds are "normalized" to a 6% YTM using the conversion factor, why would one bond be cheaper to deliver than another bond?

    3) What factors would cause the cheapest-to-deliver issue to change from one time period to another?

    4) The Dec09 30-Year Treasury Bond futures was trading at: 121'30. How do you convert this into an implied interest rate on 30-year bonds? How does one interpret this interest rate? Is it the 30-year spot rate now or the 30-year forward rate at Dec expiration?
  2. notjusttp

    notjusttp New Member

    Hi Options,

    I will try answering your questions and i m sure there is David to correct any wrong explanations given

    1) You arrive at the conversion factor depending upon the term left to maturity for a particular bond. All the bonds which are above 15 yrs of maturity become eligible to be delivered. So a bond which is of 20 yrs mat would have a conversion factor now different than 1 yr hence due to less number of coupon payments one year hence. I guess you would get a good clarity on the same if u go thru the conversion factor presentation by David.

    2) There can be a lot of reasons for the same. Bonds are issued at different times during a year and their coupons get established depending upon what the market perceives the interest to be at the time of its issue. So as mentioned by myself in point number 1 when there are lot many bonds above 15 yrs mat eligible to be delivered the CTD bond is the one which is cheaper for the seller to buy from the market which clearly is a function of demand supply mechanics for that bond.

    3) Liquidity for a particular bond and market perception ( once again demand supply mechanics) would cause ctd to change.

    4) Need davids help here.

    Trust this helps.


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