Interest rate futures
What is the Cheapest-to-Deliver (CTD) institutional bond calculation and why does it dictate contract value?
By Easy Money Scanner · Educational reference · Not investment advice
The short answer
The Cheapest-to-Deliver bond is the Treasury security that is most cost-effective for a futures seller to deliver against expiring contracts, and its price/yield directly drives the futures contract's value.
How it works
CTD is calculated by comparing each eligible bond's adjusted delivery cost against its conversion factor; the bond with lowest delivery cost becomes the pricing anchor the futures contract tracks most closely.
An example
If a 10-year note trading below par is cheaper to deliver than other eligible notes after adjusting for its conversion factor, it becomes the CTD, and ZN futures track its yield closely.
Risk & limitations
The CTD can shift between bonds as yields change, causing sudden shifts in futures duration and basis relationships that traders must continuously monitor.
Examples are hypothetical, not trade recommendations. US contract and regulatory references do not automatically apply in Canada. Rules, margin requirements and broker policies can change; confirm them with the relevant authority and your broker.