Introducing Treasury futures

Chapter 3 explores Treasury futures contracts, which enable investors to buy or sell U.S. Government debt for future delivery at a specified price. Developed in response to the economic uncertainties of the 1970s, these standardized, exchange-traded derivatives have revolutionized risk management, liquidity, and price transparency in the fixed income market. The chapter details the historical evolution of product offerings, core contract design, delivery mechanisms, and the influential conversion factor system anchored to a 6% yield. It explains the process for determining which underlying security is cheapest to deliver and the impact of conversion factor effects on hedging, pricing, and duration. Emphasizing the pivotal role of Treasury futures in facilitating arbitrage, speculation, and portfolio strategy, the chapter highlights their ongoing significance in managing interest rate risk within global markets.