Bond futures contracts are formal contracts between 2 parties, with one party borrowing money from the other party. The borrowing party will need to pay interest to the lending party.
There is a price for every bond and each bond can be traded in a bond futures contract. This is a contract between two parties to buy or sell a bond at a specified date in the future at a price agreed today.
When buying bond futures contracts, the buyer is expecting the price of the bond to go up. At delivery date, the seller will need to deliver at a higher price the number of bonds in the bond futures contract to the buyer.
Conversely, when selling bond futures contacts, the seller is expecting the price of the bond to go down. At deliver date, the seller will buy the required number of bonds in the bond futures contract at a lower price and deliver to the buyer.
Popular Treasury Bond Futures Contracts
The most popular type of bonds traded are:
US T-Bonds, T-Note (10 Year), T-Note (5 Year), T-Note (2 Year) are traded in CBOT (Chicago Board of Trade).
Eurodollar, T-Bills are traded in CME (Chicago Mercantile Exchange).
Bond Futures Contracts And Interest Rates
The price of the bonds are influenced largely by the interest rates determined by the central banks. Hence, if you are forecasting that the central banks will be raising or lowering interest rates, you will definitely want to trade in bond futures contracts.
The positions of the largest speculators in bond futures are published every week on the U.S. Commodity Futures Trading Commission (CFTC) website under the commitment of traders report (COT). This will give a good indication of how the “big boys” are positioning. Alternatively, there is a COT heatmap that gives a quick overview of the commitment of traders report.
With the world interest rates at all time low now, and high inflation, interest rates might be raised gradually over the next few years and you can profit using bond futures contracts.