Chapter 11
Treasury Futures Basis and Rolls
This chapter considers the Treasury futures market in more detail. Treasury futures are, on one level, a simple way to take a view on Treasury yields. However, there is much more depth to the product due to the range of choices presented to the seller of the futures with regard to the bond and timing of delivery. In markets, choices are never presented for free. The valuation of these choices can be traded as well and can be viewed as a type of embedded option of the type presented in Chapter 10. The embedded option forms an important component of the Treasury futures basis, which is one of the common relative value trades in the fixed income space. The basis incorporates the relative richness or cheapness of a Treasury futures contract versus members of its deliverable basket. Chapter 4 discussed the mechanics of Treasury futures contracts and some metrics to measure the relative value of the futures contracts versus similar Treasury bonds, such as the basis net of carry (BNOC). The BNOC, also known as the net basis, incorporates the value of the option to deliver any member of the delivery basket. It is this optionality that separates the Treasury futures basis from other forward/spot differences. The reader is advised to review Chapter 4 in detail to better understand the concepts outlined in this chapter.
THE FUTURES DELIVERY OPTION
In Chapter 4, we defined the gross basis as bond price – futures price × conversion factor. Trading ...
