If you get the cash price on a Treasury bond from your broker and then look up the comparable futures price, you may see a very large difference between the two. The pricing gap occurs because the bond is a real, pay-for-with-cash security while the Treasury futures contract is valued on a hypothetical bond. Therefore, the price reflects a projected yield for Treasury securities.
Treasury Futures Conventions
Since the Federal government sells new Treasury securities on a monthly basis, there exists a wide range of maturities and coupon rates floating around in the government securities markets. To simplify the choices for futures traders, contracts are available on the commodity exchanges to trade the 2-year, 5-year, 10-year, 30-year and "ultra" 30-year Treasury notes and bonds. All of the different Treasury futures prices are based on the delivery of Treasury securities of the designated maturity with a 6 percent coupon rate.
Bond and Futures Price Conventions
Futures prices use the same convention as the cash bond market. The quoted price will be a percentage of the par or maturity value of a bond with the post-decimal in halves of 32nds. For example, if the 30-year Treasury futures is trading at 133-165, a $100,000 face value bond would cost $133,515.625. The 165 after the dash or decimal indicates 16-1/2 32nds or 0.515625. Unless you are working with a bond dealer's desktop bond calculator, you need to convert those 32nds to decimal before calculating the future's price yield.
Plug Into a Yield-to-Maturity Calculator
You can find the yield indicated by the futures price using any online yield-to-maturity calculator. Use the current decimal price of the bond, the face value, a 6 percent coupon rate and the number of years until the bond matures. For a 30-year, $100,000 face value bond priced at $133,515.625 with a 6 percent coupon, the yield-to-maturity is 4.05 percent. This would be the indicated yield for a Treasury bond futures at this price. Working with a bond yield calculator will help you understand the relationship between yields and futures prices.
Grab the Futures Exchange Cheat Sheet
All of the different Treasury futures trade on commodity futures exchanges owned by the CME Group. The CME website provides in-depth information about Treasury futures and also offers a pre-built spreadsheet that converts both prices to yields and yields to futures prices. If you are working with different futures contracts and need to make a lot of yield conversion calculations, this spreadsheet will speed up your task.
