WHAT IS A BOND FUTURE?

All futures contracts have an “underlying” market or reference rate to which the contract, on expiry, settles. For financial futures, this underlying reference rate is often the cash market rate. The bond futures market is where buyers and sellers can conduct business for the purpose of preventing price fluctuations risk by hedging or speculators can trade to make profit without ownership of the bond. The price of the transaction is set now, but not payable until the expiry date if you choose to take it.

These transactions are traded at the exchange, and the standard terms for the contract are set by the exchange. The purpose of the exchange is to bring all trading participants together in one manageable place and this will in turn aid liquidity. The exchange also organises the publishing of official prices, closing prices, turnover, and open interest, all of which help transparency of the market. Investors like exchanges because they offer security for conducting business. Bond futures, due to exchanges have become very accessible, because they are very efficient, quick and liquid, making it relatively easy to trade in comparison with the actual underlying markets, i.e. selling an asset they don’t actually own, this structure encourages long-term investors and short- term investing into the business of bond futures.

It is no surprise then that futures markets are very active, they long exceed the underlying bonds, and turnover seems to break records year after year. Some would even go so far as to say that futures now lead the cash bonds.