You are using an out of date browser. It may not display this or other websites correctly.
You should upgrade or use an alternative browser.
You should upgrade or use an alternative browser.
"simple" explanation for 10 yr treasury note future pricing
- Thread starter scriabinop23
- Start date
Hi.
You can find the current yields for free here :
http://finance.yahoo.com/bonds/composite_bond_rates
And all the bond securities here:
http://reports.finance.yahoo.com/z1...tl=-1&ytu=-1&mtl=-1&mtu=-1&rl=-1&ru=-1&cll=-1
My big issue is the difference between the yields of the treasuries indicated in futures prices and the lowest yields of the corresponding bond securities.
For instance, the 2year treasuries are around 4.60%, and the bond securities deliverable to the buyer of a 2years-future are all around 4.30-4.35%, thus well below 4.60%. (of course, I do not speak of the "coupon" but I speak of the YTM,
Yield To Maturity).
Does someone know why?
I describe this issue a little more on this topic :
http://www.elitetrader.com/vb/showthread.php?s=&threadid=78047
As for the CTD, I second your request : where can we find valuable info?
I used to think we have to find it by our own, doing our own calculation with the bond securities prices.
Does someone know another way to do so?
Regards,
L.
You can find the current yields for free here :
http://finance.yahoo.com/bonds/composite_bond_rates
And all the bond securities here:
http://reports.finance.yahoo.com/z1...tl=-1&ytu=-1&mtl=-1&mtu=-1&rl=-1&ru=-1&cll=-1
My big issue is the difference between the yields of the treasuries indicated in futures prices and the lowest yields of the corresponding bond securities.
For instance, the 2year treasuries are around 4.60%, and the bond securities deliverable to the buyer of a 2years-future are all around 4.30-4.35%, thus well below 4.60%. (of course, I do not speak of the "coupon" but I speak of the YTM,
Yield To Maturity).
Does someone know why?
I describe this issue a little more on this topic :
http://www.elitetrader.com/vb/showthread.php?s=&threadid=78047
As for the CTD, I second your request : where can we find valuable info?
I used to think we have to find it by our own, doing our own calculation with the bond securities prices.
Does someone know another way to do so?
Regards,
L.
I'd like someone who understands how the 10 year t-note future pricing works to explain this for us more clearly. None of the previous posters were very helpful.
I understand that the 10 yr T note is used to regulate the money supply and is a good indicator of the economy.
There's a price chart in the investors business daily for the sept07 contract, which is currently 4 months out.
It shows the price has been falling since march from a high of 109 to the current price of 106.22
the current rate is 4.84%....
What does it mean if the price is falling for the 10 yr sept07 contract? That interest rates are expected to rise in the future? or fall?
anyone?
I understand that the 10 yr T note is used to regulate the money supply and is a good indicator of the economy.
There's a price chart in the investors business daily for the sept07 contract, which is currently 4 months out.
It shows the price has been falling since march from a high of 109 to the current price of 106.22
the current rate is 4.84%....
What does it mean if the price is falling for the 10 yr sept07 contract? That interest rates are expected to rise in the future? or fall?
anyone?
Quote from laurentc:
Hi.
You can find the current yields for free here :
http://finance.yahoo.com/bonds/composite_bond_rates
And all the bond securities here:
http://reports.finance.yahoo.com/z1...tl=-1&ytu=-1&mtl=-1&mtu=-1&rl=-1&ru=-1&cll=-1
My big issue is the difference between the yields of the treasuries indicated in futures prices and the lowest yields of the corresponding bond securities.
For instance, the 2year treasuries are around 4.60%, and the bond securities deliverable to the buyer of a 2years-future are all around 4.30-4.35%, thus well below 4.60%. (of course, I do not speak of the "coupon" but I speak of the YTM,
Yield To Maturity).
Does someone know why?
L.
I'm amazed at the lack of understanding here. I don't think you need to necessarily know these things inside out in order to trade instruments but if you want to understand how/why they move, it would be handy if you thought about these angles before you start playing.
The answer is people are prepared to pay a little more for the futures contract because they don't incur the cost of carry attached to buying the bond outright, now i.e. spot price. Higher price = lower yield.
Imagine the opportunity cost of paying full price for these bonds now as opposed to locking in a price now (by paying the margin on the futures contract), safe in the knowledge that you could earn interest on the money/invest it somewhere else until you have to settle the difference on the delivery which could be up to 3 months from now. This also explains why spot/futures prices converge when that particular contract closes in on expiry.
Quote from dimeo:
I'd like someone who understands how the 10 year t-note future pricing works to explain this for us more clearly. None of the previous posters were very helpful.
I understand that the 10 yr T note is used to regulate the money supply and is a good indicator of the economy.
There's a price chart in the investors business daily for the sept07 contract, which is currently 4 months out.
It shows the price has been falling since march from a high of 109 to the current price of 106.22
the current rate is 4.84%....
What does it mean if the price is falling for the 10 yr sept07 contract? That interest rates are expected to rise in the future? or fall?
anyone?
All that has happened here is that since March, the market's perception of interest rates 10yrs in the future (forget whether the contract is deliverable for Mar/Jun/Sep or Dec 07 as this isn't the issue) is that they may be a little higher at that point in time than they felt back in March.
Back to basics: all your 10yr gov yield is telling you is what yield is the average participant willing to receive from a 10yr fixed interest instrument. Two things affect this- forward looking interest rate expectations and the degree of uncertainty surrounding those views.
Nobody on planet earth can predict exactly where interest rates will be in 10yrs time so the 'typical' (non inverted) yield curve has it that investors expect a greater yield comparative to that which they can receive by simply receiving Fed Funds Rate. I'm not going to go into why yield curves get inverted, just take it as written that if you are throwing money at a long term fixed interest investment, logic has it that you get a return with an inbedded premium vs expected long term interest rates because you are absorbing risk.
So, if between March and present day, PRICE on the 10yr has dropped a bit, this suggests that interest rate expectations for Today +10yrs (2017) have increased. Put simply, people have been prepared to pay less to lock in the coupon on the 10yr, because they feel that the forward looking interest rate is more likely to be higher, and therefore they want a greater YIELD (the inverse of price) to be pursuaded to hold the 10yr bond.
Stats coming out in the U.S. in this time have been a fair bit better than expected and global inflation expectations have also risen somewhat during this time. All else being equal, this inevitable means higher interest rates, which means the real return on your bond coupon is worth comparatively less..... so there are more sellers and less buyers...... which means lower price and greater yield.
PLEASE dont trade the 10yr without understanding the fundamentals that drive it and make sure you have a bloomberg terminal and an economic calendar at all times. Otherwise, one day you will be waving bye bye to your account quicker than you can say non farm payrolls.
Quote from let it run:
I'm amazed at the lack of understanding here. I don't think you need to necessarily know these things inside out in order to trade instruments but if you want to understand how/why they move, it would be handy if you thought about these angles before you start playing.
The answer is people are prepared to pay a little more for the futures contract because they don't incur the cost of carry attached to buying the bond outright, now i.e. spot price. Higher price = lower yield.
Imagine the opportunity cost of paying full price for these bonds now as opposed to locking in a price now (by paying the margin on the futures contract), safe in the knowledge that you could earn interest on the money/invest it somewhere else until you have to settle the difference on the delivery which could be up to 3 months from now. This also explains why spot/futures prices converge when that particular contract closes in on expiry.
30 yr spot (bloomberg):
30-Year 4.750 02/15/2037 96-03+ / 5.00 0-00 / .000 05/25
30 yr futures (the entire strip Jun07 - Jun08): 109 9/32
Cost of carry is not what explains this price discrepancy. Furthermore, futures and spot do not converge, at least numerically (like indices do) since futures refer to bonds similarly priced assuming a fixed 6% coupon, whereas spot coupons vary.
Otherwise you'd see steadily increasing prices across the futures curve, just as most other commodity and indices show. But futures are priced locked to a 6 percent coupon. Look at ZB - all the futures are priced -practically- identically.
Still, simple math doesn't give me useable results. Haven't read the CBOT summary of bond pricing lately, but I know accrual, and conversion factor are two key items here.
I believe conversion factor is derived by 6/current coupon.
6/4.75 = 1.26
1.26 x 96 = 121.26 (instead of 109.xx)
If anyone else wants to get me from 96 -> 109 9/32 by showing the calcs, please do. Perhaps my conversion factor is too high and/or something else is at work I'm missing.
Quote from let it run:
I'm amazed at the lack of understanding here. I don't think you need to necessarily know these things inside out in order to trade instruments but if you want to understand how/why they move, it would be handy if you thought about these angles before you start playing.
The answer is people are prepared to pay a little more for the futures contract because they don't incur the cost of carry attached to buying the bond outright, now i.e. spot price. Higher price = lower yield.
Imagine the opportunity cost of paying full price for these bonds now as opposed to locking in a price now (by paying the margin on the futures contract), safe in the knowledge that you could earn interest on the money/invest it somewhere else until you have to settle the difference on the delivery which could be up to 3 months from now. This also explains why spot/futures prices converge when that particular contract closes in on expiry.
Hi. I concede I was rather confused when I tried to quote future bonds at that time.
Now things are much clearer.
And what explains most of the difference is not what you said, but the real maturities of futures.
For instance, the 30Y futures is related to the delivery of a bond which is from 16.5Y to 30Y, that is to say that most of the time, when bond rates (YTM, not coupons) are below the 6% level, the bond with the nearest maturity is the one that would be the Cheapest To Deliver (CTD).
Therefore the 30Y futures relates currently to the 16.5Y bond, which is of course very different from the
pricing of the 30Y bond !
What about the other thing which is very important ?
The conversion factor !
Quote from scriabinop23:
30 yr spot (bloomberg):
30-Year 4.750 02/15/2037 96-03+ / 5.00 0-00 / .000 05/25
30 yr futures (the entire strip Jun07 - Jun08): 109 9/32
Cost of carry is not what explains this price discrepancy. Furthermore, futures and spot do not converge, at least numerically (like indices do) since futures refer to bonds similarly priced assuming a fixed 6% coupon, whereas spot coupons vary.
Otherwise you'd see steadily increasing prices across the futures curve, just as most other commodity and indices show. But futures are priced locked to a 6 percent coupon. Look at ZB - all the futures are priced -practically- identically.
Still, simple math doesn't give me useable results. Haven't read the CBOT summary of bond pricing lately, but I know accrual, and conversion factor are two key items here.
I believe conversion factor is derived by 6/current coupon.
6/4.75 = 1.26
1.26 x 96 = 121.26 (instead of 109.xx)
If anyone else wants to get me from 96 -> 109 9/32 by showing the calcs, please do. Perhaps my conversion factor is too high and/or something else is at work I'm missing.
I do not have enough time to explain how you can calculate the conversion factor, but the easiest way is to pick it up from the cbot website, as the calculation is more complex than 6 / 4.75...
Please do not hesitate to take the most recent CF there :
http://www.cbot.com/cbot/pub/cont_detail/0,3206,980+20356,00.html
Then multiply the CF of the CTD bond by its security price, and you would find "nearly" the future price.
At last, there remains some discrepancies, especially the différence between the repo rate and the YTM rates of the CTD bond (before the delivery day...), and the valuation of the "option" that you pay when you short futures (to ask for delivery or not...)