How to think about treasury futures prices
I am struggling to understand how to think about treasury bond futures prices (from the perspective of a trader/speculator).
Let's take the ultralong bond as an example (WNZ2), it currently trades at 148-08 (148.25).
I understand the very basics of the contract, it's based on a 30yr bond with a 6% coupon (but shorts can deliver any bond from 25-30 years).
Bloomberg tells me the cheapest to deliver (CTD) bond is currently a 3% treasury maturing 02/15/48 (CUSIP 912810SA7) which trades at 91.25 for a yield of 3.516%. Using the conversion factor, and the accrued interest, I can roughly derive the futures price from that as (91.25 - 0.1467391 accrued interest) / 0.6141 conversion factor = 148.35.
Let's say I think long-end rates will fall ~51.6bps, and that cheapest to-deliver bond will yield 3%, which implies a price of ~100. Then the futures price should be 162.8 (assuming no accrued interest for simplicity).
That would net me a profit of (162.8-148.25) * 1,000 = $14,550 per contract
Is that how I should come up with a target price for WNZ2 (e.g. start with my expected yield of the CTD bond and work backward to get the futures price?
Yes, that's exactly right.
Magnam et doloribus provident ut voluptatibus quia voluptate. Labore quo sit sint blanditiis consectetur. Facilis excepturi asperiores aut enim autem aut expedita.
Est sequi voluptas ab nesciunt commodi pariatur eos. Eius alias ut fuga a sed quasi ut.
Accusamus blanditiis possimus reiciendis. Sapiente suscipit magni non et a. Voluptatem ratione occaecati magnam ipsam. Ad itaque qui non quo. Debitis dolores neque omnis repellendus consequatur et. Iste voluptatem dolor totam voluptatem.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...