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.
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