10
$\begingroup$

I would like to know how I can calculate the yield of a bond futures contract(say the 5 yr treasury "FVM05" is trading at 108.2)? I am not sure how to go about calculating the yield of the futures contract?

Need some guidance in doing so.

Improve this question
$\endgroup$
0

2 Answers 2

Reset to default
11
$\begingroup$

There's a lot of intracacies involved and you've got several options. Let's go through an example, using the current front-month 5-year contract FVU6 (FV expiring in September 2016).

  • CTD Yield: The cheapest-to-deliver ("CTD") into FVU6 is the 1.625s of 11/30/2020 and its yield to maturity as of last close is 1.075%. You can simply use this as a proxy as the futures yield. This may seem dumb, but it's actually the one of the most prevalent choices in time series analyses. It works particularly well when the futures contract is fairly priced relative to cash bonds and the CTD is highly likely to be delivered into the contract (as it stands, 1.625s of 11/30/2020 has 100% delivery probability).

  • CTD forward yield: Given that a futures contract more closely resemble a forward, it is natural to calculate the forward yield of the CTD. You can calculate the forward price for the CTD using the cash-carry formula, assuming that the forward date = delivery date (10/5/2016 in this case). The forward price can then be converted back into a forward yield. For FVU6, we'd have 1.105%.

  • Futures implied yield: You can also calculate the so called futures implied yield. This is computed by assuming that the forward price of the CTD is the futures price multiplied by the conversion factor. In this case, the futures price is 121.46875, while the conversion factor for the 1.625s of 11/30/2020 is 0.8408, so you would assume that the CTD's forward price is $121.46875 \times 0.8408 = 102.130925$. Then you simply calculate the yield to maturity, assuming that the settlement date is the delivery date (10/5/2016), which nets you a yield of 1.099%.

These methods above assume that the CTD will not change between now and the delivery date. If that's not the case, you may want to calculate an average yield, weighted by CTD delivery probabilities.

Improve this answer
$\endgroup$
2
  • 3
    $\begingroup$ Where do the numbers 1.625 and 1.075% come from? Where does the date 11/30/2020 come from? I've come here hoping to see a formula and all I see are magic numbers $\endgroup$
    – CashCow
    Nov 12, 2019 at 8:56
  • $\begingroup$ @CashCow it's the FUT_CTD Field on Bloomberg. It will tell you which Bond (Treasury) in the case of US Government is the Cheapest to Deliver for the given Bond Future. $\endgroup$
    – godimedia
    Dec 27, 2019 at 15:57
0
$\begingroup$

I think you can't just assume the yield of the CTD for a future. You need to also subtract the repo cost since a bond future = fwd = cash bond + repo. So i would say CTD fwd yield minus repo cost. No?

Improve this answer
$\endgroup$
1
  • 1
    $\begingroup$ When you trade a bond future versus swap in yield terms, you need a mechanism to determine the yield on the future. In the EUR IRS market that mechanism is to calculate the yield of the CTD bond with settlement on the delivery day of the future (next contract is 12 Jun 2023) with a price that is the future price multiplied by the CTD conversion factor. When trading in yield terms that formula is rearranged to give the traded future price that is reported to the exchange. When the CTD is ambiguous it is defined in advance of trading. $\endgroup$
    – Attack68 ♦
    May 24 at 16:57

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge that you have read and understand our privacy policy and code of conduct.

Not the answer you're looking for? Browse other questions tagged or ask your own question.