Fixed Income Securities, 4th Edition

CHAPTER 11Note and Bond Futures

Futures on government bonds are among the most liquid fixed income products around the world, used to hedge interest rate risk and to take positions on changes in bond prices. Figure 11.1 shows how the total DV01 traded across all US Treasury bonds and futures is divided across instruments.¹ By this metric, the 10‐year note futures contract is the single instrument with the greatest volume, and volumes traded in other futures contracts rival those of on‐the‐run Treasury securities. Futures contracts are appealing because of their liquidity, and also because relatively little cash is required to establish sizable positions. The US Treasury futures discussed in this chapter trade on the CBOT (Chicago Board of Trade), which is part of the CME Group.

A forward contract on a bond is an agreement that fixes the price at which a bond is to be bought and sold on some future date. Forward contracts on bonds are rarely traded in the United States, because, as is shown next, the same economics can be achieved by trading bonds and repo. Understanding forward contracts is important, however, because futures are essentially forwards with the complexities of daily settlement and various delivery options. This chapter, therefore, first describes forward contracts and then adds these features of futures contracts. The exposition includes a discussion of basis trades, in which futures are traded against synthetic forward bond positions, and the chapter concludes ...