he pricing efficiency of futures contracts has received considerable attention T from researchers. Specifically, the relationship between the spot and futures markets for Treasury securities has been examined to determine whether any profitable arbitrage opportunities existed. Earlier studies reported such opportunities but subsequent, more refined, studies generally found little opportunity for profit.
Most of these studies, however, dealt with both the cash and futures markets. In contrast, our study focuses on only the futures markets, examining a more complex pricing relationship between T-bill and T-bond futures.
At any point in time, the three-month repurchase (repo) rate implied by the Tbond price of two adjacent futures delivery months should be equivalent to the threemonth T-bill futures rate for the comparable time period. However, temporary demandsupply imbalances or time lags in market response to new information may cause these two rates to differ. They may also differ because T-bond futures have a grade and time basis risk not found with T-bill futures. This risk differential, then, may lead to an implied repo rate higher than the T-bill rate.* Nevertheless, the implied rep0 rate should tend to have a stable relationship with the T-bill rate.