Treasury bond futures delivery bias

✍ Scribed by James F. Meisner; John W. Labuszewski

• Publisher: John Wiley and Sons
• Year: 1984
• Tongue: English
• Weight: 511 KB
• Volume: 4
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.3990040409

✦ Synopsis

rity or call. As of this writing, there are over 20-issues "good" for delivery. Typically, however, only a handful of these issues are actually delivered during a particular contract month. In fact, on any given date, deliveries tend to be dominated by a single issue.

These circumstances may be attributed to the fact that some issues are most economic-or "cheaper" in market parlance-to deliver in satisfaction of a T-bond futures contract. This "cheapest to deliver" phenomenon may be traced to: (1) biases inherent in the T-bond futures "conversion factor" invoice system, and (2) cash market peculiarities which tend to favor certain bonds over others. This article explores the nature and severity of these two sources of delivery bias in the T-bond futures market and the practical implications of this phenomenon.

I. T-BOND FUTURES INVOICING SYSTEM

Holders of short T-bond futures positions are entitled to make delivery of $100,000 face value bonds with at least 15 years to maturity or call on any business day during the delivery month, at their own discretion. Shorts intending to make delivery present a "notice of intention to deliver" to the CBT Clearing Corporation on the second business day prior to the intended delivery day (position day). The Clearing Corporation matches the short to the holder of the oldest outstanding long position. On the business day immediately preceding the intended delivery day, the short is required to invoice the long for the delivery, based on the previous day's futures settlement price.