Bond Futures Basis Analysis

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What is Bond Futures Basis?

• Implied repo > market repo: the basis is cheap (futures are rich relative to cash). Buying the basis (buy cash, sell futures) is potentially profitable.
• Implied repo < market repo: the basis is rich (futures are cheap relative to cash). Selling the basis (sell cash, buy futures) is potentially profitable.

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Why It Matters

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Key Concepts

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How It Works

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Worked Example: Bund Futures Basis Analysis

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Setup

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Step 1: Futures Pricing

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Step 2: CTD Bond Pricing

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Step 3: Basis Metrics Calculation

Gross Basis = Cash Price - (Futures Price x Conversion Factor)
            = 94.82 - (133.42 x 0.7124)
            = 94.82 - 95.05
            = -0.23 ticks (negative -- futures price implies higher cash value)

Coupon income = 0 (zero coupon bond)
Financing cost = 94.82 x (3.40% repo rate) x (85/360) = 0.761
Carry = Coupon income - Financing cost = 0 - 0.761 = -0.761

Net Basis = Gross Basis - Carry
          = -0.23 - (-0.761)
          = 0.53 ticks

Implied Repo = [(Futures Invoice Price - Cash Purchase Price) / Cash Purchase Price] x (360/Days)
             = [(133.42 x 0.7124 + 0) - 94.82] / 94.82 x (360/85)
             = [95.05 - 94.82] / 94.82 x 4.235
             = 0.00243 x 4.235
             = 1.03%

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Step 4: Assessment

• For hedgers: Hedging with futures (selling futures to hedge cash bond portfolios) is expensive — you are effectively paying 222bp more than fair value for the hedge.
• For basis traders: Selling the basis (sell cash bonds, buy futures) is potentially attractive, as you earn the repo rate on the cash proceeds while the futures position is financed at the lower implied repo.

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Step 5: Historical Context

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Trade Recommendation

• Position: Short EUR 10M face of DBR 0% Feb 2034, Long 13 FGBL contracts (DV01-neutral sizing: EUR 10M x 7.70 / EUR 78.50 per contract = 9.8 contracts, round to 10; adjust with conversion factor: 10 / 0.7124 = 14, round to 13)
• Expected P&L: ~222bp annualized carry advantage x EUR 10M x 85/360 = EUR 52,400
• Risks: CTD switch (if yields move significantly, a different bond becomes CTD), delivery squeeze, financing risk
• Conviction: Medium-High (basis is historically rich, but year-end effects may keep it elevated)

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Daily Workflow for Basis Analysis

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Practice Exercise

• ZN March 2026 futures price: 110-16 (110 and 16/32nds = 110.500)
• CTD Bond: UST 3.875% Nov 2033 (CUSIP: 91282CKH0)
• Conversion Factor: 0.8856
• CTD clean price: 98.125
• CTD accrued interest: 1.420 (per $100 face)
• CTD yield: 4.22%
• CTD DV01: $7.85 per$100 face
• ZN contract DV01: $71.50 per contract
• Days to delivery: 72
• Federal funds rate: 4.50%
• Market repo rate: 4.35%

1. Calculate the gross basis in 32nds.
2. Calculate carry (coupon income - financing cost) for the 72-day period.
3. Calculate the net basis (BNOC).
4. Calculate the implied repo rate.
5. Compare implied repo to the market repo rate. Is the basis cheap or rich?
6. If you wanted to execute a DV01-neutral basis trade on $50M face value of the CTD, how many futures contracts would you need?
7. Estimate the annualized P&L from the basis trade if the basis converges to fair value by delivery.

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Common Mistakes

1. Confusing gross basis with net basis. The gross basis includes carry; the net basis (BNOC) strips carry out to reveal the pure delivery option value. A large gross basis does not necessarily mean the basis is rich — it may simply reflect high carry.
2. Ignoring the conversion factor when sizing trades. The conversion factor adjusts the delivery price — failing to account for it leads to incorrect position sizing and P&L calculations.
3. Assuming the CTD is static. The CTD can change when yields move significantly. In a rising rate environment, lower-duration bonds become CTD; in a falling rate environment, higher-duration bonds become CTD. Always know how far yields need to move for a CTD switch.
4. Not accounting for accrued interest in the basis calculation. For coupon-bearing bonds, accrued interest affects both the dirty price and the carry calculation. A basis computed from clean prices alone will be incorrect.
5. Using the wrong repo rate. The implied repo should be compared to the actual term repo rate for the delivery period, not the overnight rate. General collateral (GC) repo rates can differ from the overnight policy rate by 5-30bp.
6. Ignoring delivery date mechanics. Bond futures have specific delivery windows and notice periods. The short chooses the delivery date (a valuable option). Analyze the full delivery window, not just the first or last delivery date.
7. Not monitoring basis volatility. A basis that is historically cheap may stay cheap (or get cheaper) if structural factors are driving it (balance sheet constraints, central bank QE/QT, supply dynamics). Historical percentiles are useful context but not trading signals on their own.
8. Neglecting the DV01 hedge ratio. A DV01-neutral basis trade requires adjusting the number of futures contracts based on the cash bond’s DV01 relative to the contract DV01. Getting this ratio wrong creates unintended directional exposure.
9. Forgetting about the delivery option value. The net basis should generally be positive (the delivery option has value). A negative net basis is unusual and may signal a trading opportunity — or a data/calculation error. Always verify negative net basis readings.
10. Not considering financing term. Basis trades require repo financing for the cash bond position. If term repo is unavailable or expensive (e.g., over quarter-end), the trade may not be economically viable even if the basis looks cheap.

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How to Add to Your Local Context

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Best Practices

• The net basis represents embedded delivery option value — it should generally be positive. A negative net basis is unusual and may signal a trading opportunity or a data issue.
• CTD switches happen when yield levels change significantly — be aware of the CTD’s distance from the “switch point”
• Historical basis context (current percentile vs. 3M and 6M averages) is essential for assessing whether current levels are attractive
• Basis trades require careful position sizing because the cash bond and future have different DV01s — use the conversion factor and DV01 ratio
• Monitor repo market conditions closely — basis trading profitability depends on the spread between implied and actual repo rates
• Be aware of calendar effects: quarter-end and year-end often cause basis widening due to dealer balance sheet constraints
• For sovereign futures (Treasuries, Bunds, Gilts), credit risk is negligible — but repo market dynamics can still distort the basis