US treasury futures - Can I assume them as 6% coupon yield?

CFA General
#1

Hello all,

I have tried to understand conversion rate and the reasoning behind discounting by 6% YTM for standardization.

When I found US treasury futures price from CME group for different maturities(2,3,5,10 and 30) they are all trading above par.

I have used bond pricing/valuation calculation with FV = 100, Y=y/2 from the treasury yield curve, maturities = 2*n, and c=3 to calculate PV which matched quite closely with CME group’s futures price.

My guess and conclusion was US treasuries are priced with 6% coupon and 100 FV discounted by the treasury yield curve.

If anyone could advise, I would appreciate it!

#2

You might find the details here: US Treasuries

I poked around a little and didn’t see the assumptions on the underlying securities. I know that T-bond futures assume an underlying noncallable, 20-year, 6% coupon bond, but I’m not sure about the details on the rest.

If you find the details, please let us know.

#3

Market price of deliverable bond = settlement price of UST Futures * CF (If we make assumption no accrued interest)

CF = Market Price of Deliverable bond / Settlement price of UST Futures

CF = deliverable bond’s cash flow discounted by 6% YTM / FV (which is 1000)

I have hard time connecting the two intuitively.

Market price of deliverable bond should be per bond pricing method PV of deliverable bond discounted by its own YTM.

Settlement Price of UST Futures should be PV of UST discounted by its own YTM.

Market Price of deliverable bond = Cash flows discounted by its own YTM

Conversion Factor = Cash flows discounted by 6% divided by Par value/Face Value

Market Price / Conversion Factor = Discounting by Bond’s original YTM / discounting by 6% YTM

= Settlement Price of UST Futures which is discounted PV of Futures specified cash flows.

The above was what I did. I can only conclude that the reasoning for 6% discount and mentioning of to match with the futures par value should be that the futures are based on 6% coupon… I have read the CME’s write ups for US treasuries: “understanding treasury futures.” but couldn’t find the exact definition so I’m just beating around the bush and trying inductive reasoning…

#4

FYI, from CME’s material, when you look at each Treasury futures, their conversion rate use the 6% rule just the same as T bond. no maturities of 20 years though.