A Treasury quoted at 90 looks cheaper than one quoted at 100. For a futures seller, the higher-priced bond can nevertheless be the less expensive delivery: the missing valuation input is how much cash the buyer must pay when that particular security arrives.
Those prices belong to the hypothetical example below, not a current market quote. The point is a comparison that a cash-price screen cannot finish. Treasury futures give the seller a choice among eligible securities, and an exchange-assigned conversion factor helps determine the payment for each. The purchase price and the delivery proceeds have to be read together.[1][2]
The contract supplies a second price
A physically delivered Treasury futures contract does not oblige its seller to hand over whichever bond the buyer prefers. The short position chooses a security from the contract's eligible basket, subject to the delivery rules. The buyer receives that security and pays an invoice calculated under those rules.[2]
The conversion factor connects the common futures quote to the different securities in the basket. CME describes it as the estimated decimal price of a bond yielding 6%, using prescribed coupon and remaining-maturity conventions. It stays fixed for that security and delivery month. Market prices keep moving around it.[1]
That reference yield is a standardization device. It is neither the bond's current yield nor a return promised to the futures buyer. A low factor generally reduces what the seller receives for delivering the bond; a low cash price reduces what the seller spends acquiring it. Either side can dominate the comparison.
CME's delivery formula scales the futures settlement price by the conversion factor and contract size, then adds accrued interest.[2] Expressed per unit of face value, its clean-price component is simply:
Converted futures price = futures settlement price × conversion factor.
The factor adjusts the payment. It does not give the seller permission to deliver a smaller face amount of bonds.
Buy cheaper, receive even less
Consider two assumed eligible bonds, A and B, against the same futures contract. Use a futures price of 110 and express all prices as decimal points per 100 of face value. These are deliberately rounded teaching inputs, not actual securities or executable quotes.
For this first comparison, put acquisition and delivery on the same settlement date, exclude transaction costs, and compare clean prices. Accrued interest then enters both the purchase payment and the delivery receipt for each bond and cancels within that bond's comparison. There is no intervening financing period.
| Measure | Bond A | Bond B |
|---|---|---|
| Clean cash price | 100 | 90 |
| Conversion factor | 0.90 | 0.80 |
| Delivery proceeds | 99 | 88 |
| Gross basis | 1 | 2 |
Buying B saves ten price points. But delivering B also brings in eleven fewer points. Its lower invoice more than consumes the apparent bargain, leaving A with the smaller delivery shortfall.
This difference between the clean cash price and the converted futures price is the gross basis, using CME's definition.[3] Under the example's assumptions, A is cheaper to deliver even though it costs more to buy. Both alternatives show a shortfall; identifying the smaller one does not establish that initiating either trade would be profitable. Nor does this delivery comparison include any earlier gains or losses on an existing futures position.
The table answers a narrow question: which of these two securities is the more economical way to satisfy the same delivery obligation at the stated prices? It says nothing about which bond offers a better long-term investment.
Time can change the winner
The strongest counterweight is that traders usually acquire the bond before delivering it. Between those dates, coupons can arrive, interest accrues, and financing has a cost. CME therefore treats the gross-basis calculation as a starting point and discusses implied repo rates that incorporate the security's cash flows.[3][4]
An implied repo rate measures the annualized return implied by buying the bond and delivering it against futures, before paying the actual financing bill. Comparing that return with available financing terms helps assess whether the apparent opportunity survives. A convenient headline rate for Treasury collateral is insufficient if the particular security can be financed on different terms.[4][5]
For our example, the ranking has a concrete falsifier. If B's net carry advantage over A exceeds their one-point gross-basis gap, B becomes the cheaper delivery, assuming other costs and the delivery date remain equal. Here, net carry means the income earned while holding the bond less the cost of financing it. A wins only while its initial advantage survives that adjustment.
The seller's freedom to change securities also has value. Dallas Fed researchers explain that Treasury futures embed choices over both the bond and the timing of delivery. Yield-curve movements and financing conditions can alter which choice is best, and those options affect the futures price itself.[5]
My valuation inference is that a cheapest-to-deliver label is conditional: it describes a security, contract month, set of prices, and financing assumptions. Carrying yesterday's label into today's calculation can import an obsolete answer. Hedgers care too, because Treasury futures tend to track the cheapest deliverable closely; a change in that security can change the exposure being hedged.[4]
Three moments to recheck the comparison
- When the next quarterly contract becomes the trading focus: verify eligibility and use conversion factors for that delivery month. A security identifier alone does not specify the correct factor.[1]
- At each coupon payment or financing renewal before delivery: update the remaining cash flows and obtainable funding terms. This is where the gross-basis leader can lose its advantage after carry.[4][5]
- On the contract's intention day and notice day: reconcile the applicable futures settlement price with the identified deliverable, its conversion factor, and accrued interest. These delivery events turn an estimated comparison into the invoice the buyer must actually pay.[2]
Sources
- CME Group, “Calculating U.S. Treasury Futures Conversion Factors” — reference yield, coupon and maturity conventions, and factors by delivery month.
- CME Group, The Treasury Futures Delivery Process, eighth edition, especially “Invoicing for Treasury futures deliveries” — delivery choices, invoice calculation, and intention/notice procedures.
- CME Group, “The Basics of Treasuries Basis” — clean cash price minus conversion-adjusted futures price, and the limits of a gross-basis comparison.
- CME Group, Understanding Treasury Futures, sections “Cheapest-to-Deliver,” “Implied Repo Rate,” and “Hedging” — cash-flow adjustments, delivery economics, and hedge sensitivity.
- Srini Ramaswamy, Hugo De Vere, Matthew McCormick, and Seth Searls, “How sensitive is the Treasury cash-futures basis trade to funding condition shifts?” Federal Reserve Bank of Dallas, July 15, 2025 — financing comparisons and embedded delivery options.
- Nikopoley, “Chicago Board of Trade Building,” July 2007, Wikimedia Commons — original photograph and attribution record, CC BY-SA 2.5.