Treasury Futures Basis and Rolls

This chapter discusses the treasury futures market. It is 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. 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. By trading treasury futures and the underlying treasury bonds, some of the value in these delivery options can be captured. However, with the treasury basis, assumptions can be very dangerous, and small details, if left unmonitored, can lead to large losses. Some of these complexities regarding the futures contract also need to be accounted for when rolling the contract from one quarter to the next.