Asking for help in understanding ZB pricing

D

dareminator

I am learning about interest rate futures. The way I read things, receiving delivery on a futures contract would be a much cheaper way of acquiring treasury bonds than buying them in the bond market. It shouldn't be so, and I am looking for help to understand where I'm wrong.

The "Treasury Futures Delivery Process (PDF)" document on cmegroup web site describes that upon delivery the price paid by the buyer (long contract holder is):
principal amount + accrued interest
Principal amount = futures settlement price x contract size x conversion factor
For ZB With today's price of about 141'000 and conversion factor of 0.7950 (from cmegroup.com), principal amount = $112,095
Accrued interest = $520
Invoice amount (the amount the buyer will pay the seller to receive $100,000 face value of treasury bonds) is $112,615.

However, the price of the 05/15/2038 bond today (one of the deliverable grades for ZB) is 139'160 ($139,500 to buy $100,000 face value).

What am I missing? I will appreciate any pointers. Thanks in advance.
 
Quote from dareminator:

I am learning about interest rate futures. The way I read things, receiving delivery on a futures contract would be a much cheaper way of acquiring treasury bonds than buying them in the bond market. It shouldn't be so, and I am looking for help to understand where I'm wrong.

The "Treasury Futures Delivery Process (PDF)" document on cmegroup web site describes that upon delivery the price paid by the buyer (long contract holder is):
principal amount + accrued interest
Principal amount = futures settlement price x contract size x conversion factor
For ZB With today's price of about 141'000 and conversion factor of 0.7950 (from cmegroup.com), principal amount = $112,095
Accrued interest = $520
Invoice amount (the amount the buyer will pay the seller to receive $100,000 face value of treasury bonds) is $112,615.

However, the price of the 05/15/2038 bond today (one of the deliverable grades for ZB) is 139'160 ($139,500 to buy $100,000 face value).

What am I missing? I will appreciate any pointers. Thanks in advance.
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The short ZB holder has the right to choose which Treasury Security (based on the CME parameters) to deliver to the long ZB holder.

There is something called "Cheapest to Deliver" (CTD). The big boys will figure out which Treasury security is the CTD and will deliver that security. A bond today may be CTD but on delivery date another one may become the CTD.
 
Quote from freehouse:

The short ZB holder has the right to choose which Treasury Security (based on the CME parameters) to deliver to the long ZB holder.

There is something called "Cheapest to Deliver" (CTD). The big boys will figure out which Treasury security is the CTD and will deliver that security. A bond today may be CTD but on delivery date another one may become the CTD.
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That explains it. I did a spot check on the 20 bonds eligible for ZB delivery. The cash price and the delivery invoice price on the 02/15/26 expiration 6% coupon bond is about the same. Mystery solved for me, thank you freehouse for the pointer.
 
Quote from bbk:

where did you check the 20 bonds eligible for ZB delivery? Thanks
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At http://www.cmegroup.com/trading/interest-rates/treasury-conversion-factors.html you will find a link at the bottom of the page to download the latest conversion factor spreadsheet: "December 22 and 23, 2008 Treasury Conversion Factors". The first tab lists all eligible bonds for delivery and the respective conversion factors. The other tabs contain the bonds security database and the auction schedule.
 
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