Bond Future
Also known as: Treasury future, Bund future
The exchange-traded proxy for government bonds — and a delivery puzzle that keeps traders honest.
1 · SnapshotThe one idea to remember
2 · BeginnerWhat is it, really?
A bond future is a standardised contract to buy or sell government bonds at a set price on a set date — the Treasury future in the US, the Bund future in Europe. It's how most of the world actually trades interest-rate risk: enormous liquidity, tiny margins, one click.
Twist one: the seller doesn't deliver one specific bond, but may choose from a basket of eligible bonds. Twist two: because those bonds differ, each has a conversion factor meant to put them on equal footing — imperfectly, which creates the famous "cheapest-to-deliver" game.
For most users none of this matters: they trade the future as a pure bet or hedge on government bond prices — rates up, future down; rates down, future up — and roll it before delivery ever happens.
Point at a line to pick it out from the others.
a paymentsomething deliverednot a payment
A bond future is not a future on one bond. It is a future on a basket, and the seller chooses from it.
On the trade date
- The buyer → The seller As with any future, the contract starts at zero value.
Every day
- The seller → The buyer Paid before the next session in whichever direction it went. A hedge that is right about the year can still cost money every week of it.
At delivery, if it gets that far
- The buyer → The seller The futures price times a published conversion factor, plus accrued interest. It is not the price on the screen.
- The seller → The buyer Any bond in the basket may be delivered, so the seller naturally picks the one that is cheapest to deliver — and that choice is what prices the contract for everybody.
Margin, notices and the delivery calendarafter the trade
a paymentonly if a condition is metnot a payment
Throughout
- Either side → Your broker You face your broker; the broker faces the clearing house.
- Your broker → Clearing house The clearing house is the counterparty to both sides and carries no position of its own.
Into the delivery month
- Clearing house → Either side Anyone not intending to deliver or receive must close or roll before the notice period. Most do.
- Asset class
- Rates derivatives
- Instrument type
- Future with physical delivery
- Traded
- Exchange (CBOT, Eurex)
- Typical users
- Every fixed-income manager on earth
Which risks decide the outcome
Not how risky this is, and not a rating — there is deliberately no total. It says which of five failure modes drives what happens here, in the same order on all 129 products so they can be compared. This publication's own reading; see the notice below.
- Marketdecides it
- Creditbarely applies
- Liquiditybarely applies
- Fundingdecides it
- Operationalmatters
What decides it here. The seller chooses which bond to deliver from a basket, so the cheapest-to-deliver decides the price for everybody — a quiet operational fact with a large market consequence.
3 · IntermediateHow it works in practice
Contract design
- Notional: e.g. $100k (Treasuries) / €100k (Bund) of a notional 6% bond.
- Delivery basket: bonds within a maturity window (e.g. 8.5–10.5y for the Bund) are deliverable.
- Conversion factor (CF): approximately the bond's price at a 6% yield — the seller receives futures price × CF + accrued.
- Delivery month options: the short chooses which bond and (in the US) when in the month — free options that shave the fair futures price.
Cheapest-to-deliver (CTD)
Conversion factors would be perfect only if all yields were 6%; since they aren't, one bond is always cheapest for the short to buy and deliver. The future tracks that bond — its duration, its yield — and when yields cross 6% or the basket changes, the CTD can jump, abruptly changing the future's personality.
Uses
- Duration management: adjust a portfolio's rate risk instantly with futures rather than trading bonds.
- Basis trading: cash bond vs. future — the "basis trade" that grew into a multi-hundred-billion-dollar hedge-fund strategy (and a financial-stability talking point).
- Curve trades: 2y vs 10y futures spreads, etc., in one liquid package.
4 · AdvancedPricing & valuation
Pricing: carry and the short's options
Fair futures price ≈ forward price of the CTD divided by its conversion factor, minus the value of the delivery options:
What the symbols mean
- Fthe forward or futures price
- Sthe price of the underlying today
- Cthe price of a call option
- Tmaturity, in years
- Dduration: how far a bond's cash flows sit in the future
where carry = financing cost − coupon accrual (repo-driven), and DOV (delivery option value) prices the short's switch/timing/wildcard rights — computed by scenario analysis over yield shifts that change the CTD.
The basis
Gross basis \(= S - F \times CF\); net basis subtracts carry, leaving ≈ DOV. Basis trades short the rich leg and finance the bond in repo; profitability lives in repo specialness and option mispricing. The strategy's leverage (50–100x via repo) is why regulators monitor it — the March 2020 unwind moved the entire Treasury market.
Risk metrics through the CTD lens
The future's DV01 = CTD's forward DV01 / CF; its "yield" is the CTD's forward yield. Near CF-yield (6%) crossovers, effective duration becomes state-dependent — the future embeds a switch option, giving it negative convexity versus holding the CTD outright.
Cross-market plumbing
Invoice spreads (futures vs. matched-maturity swaps) and futures-implied repo vs. GC define the richness/cheapness map that rates RV desks live on.
The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.
5 · Desk notesHow practitioners think about it
Now say it back
Close the page and give Bond Future in four sentences. It takes a minute and it is the only way to find out whether reading it was enough.
- Who wants what — two parties wanted opposite things badly enough to write it down.
- What the contract obliges, and when — not the payoff; the obligation.
- Where the money comes from — name the source, or you have described a hope.
- What makes it lose — the ordinary way, not the dramatic one.
Put Bond Future beside any other instrument →
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