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 * Learn about the Treasuries Delivery Process

 * Understand Treasuries Contract Specifications

 * The Basics of Treasuries Basis

 * Get to know Treasuries CTD

 * How Can You Measure Risk in Treasuries?

 * Calculating U.S. Treasury Pricing

 * Treasuries Hedging and Risk Management

 * Treasury Intermarket Spreads - The Yield Curve

 * Understanding Micro Treasury Futures


3 Min
Lesson 3 of 9
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THE BASICS OF TREASURIES BASIS

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In U.S. Treasury futures, the basis is the price spread, usually quoted in units
of 1/32, between the futures contract and one of its eligible delivery
securities. 

This example will show how basis is determined and will help to consider what
market action might do the level of the spread or basis. 

Starting with the list of U.S. Treasury securities eligible for delivery into a
quarterly U.S. Treasury futures contract, the list could range from relatively
small (three issues versus the Ultra Ten-Year contract) to many (18 issues
versus the Ultra Bond contract). Each eligible security has its own conversion
factor for the respective quarterly futures contract it is eligible for. The
conversion factors are set based on the pricing to the first business day of the
quarterly contract month and are fixed for the life of that contract month. The
variable inputs to the basis are therefore the price of the futures contract and
the price of the security being considered, both subject to changing market
conditions.


WHAT IS BASIS?

Basis can be defined as the difference between the clean price of the cash
security minus the converted futures price.



Basis = Cash Price – (Futures Price x Conversion Factor)



For example, consider a cash 5-year note, the 1.75% of November 30, 2021 versus
the March 2017 5-year U.S. Treasury futures contract (FVH7). 

Assume the price of the cash security to be 99-10+ (1/32), the price of FVH7 to
be 117-18+ (1/32), and the conversion factor (CF) of the cash security versus
March 2017 5-year futures to be 0.8292.  Because U.S. Treasury cash and futures
products trade in full points and fractions of a 1/32 we must first convert our
futures and cash prices to decimal then perform the math, then convert back to
1/32 form.


STEP ONE: CONVERT PRICES FROM 1/32 TO DECIMAL

Pfutures = 117-18+ (1/32s) = 117.578125

CF = 0.8292, Pfutures = (117.578125 x 0.8292) = 97.49578125

Pcash = 99.10+ (1/32s) = 99.328125


STEP TWO: PERFORM THE MATH IN DECIMAL

Basis = 99.328125 – 97.49578125 = 1.83234375


STEP THREE: CONVERT BACK TO 1/32S

1.83234375 = 58.64 (1/32s)

Once this is done with all the securities eligible for delivery, traders can
either trade the basis outright or use the gross basis as a starting point for
deeper relative value analysis like calculating the cheapest-to-deliver (CTD)
security of a given futures contract.

Trading of the U.S. Treasury basis is active part of the U.S. Treasury
securities market.  Basis trades can be executed and submitted for clearing at
CME Group via an exchange-for-physical (EFP) transaction under Rule 538 of the
exchange.   


TEST YOUR KNOWLEDGE

THE BASIS SPREAD IS THE DIFFERENCE BETWEEN THE CASH PRICE OF THE BOND AND THE
CONVERTED FUTURES PRICE.

True
False


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