Deliverable Basket
The deliverable basket is the set of Treasury securities that are eligible for physical delivery into a given Treasury futures contract at expiration, as defined by the CME Group based on maturity range and other criteria, with the short futures holder choosing which eligible security to actually deliver.
Each Treasury futures contract specifies a range of eligible maturities that define the deliverable basket. For the CME Group 10-year Treasury Note futures contract, eligible securities are Treasury notes and bonds with remaining terms to maturity of at least 6 years and 6 months but not more than 10 years as of the first day of the delivery month. The Ultra 10-year futures requires remaining maturities of 9 years and 5 months to exactly 10 years, creating a distinct and narrower basket. The Long Bond futures basket includes bonds with at least 15 years remaining maturity.
At any given time, the 10-year basket might contain 15 to 25 individual Treasury notes and bonds, all meeting the maturity criteria, each with its own coupon, maturity date, and assigned conversion factor. The diversity of securities in the basket creates the CTD dynamic: among all eligible bonds, the short futures holder will identify and deliver the one that is most economically advantageous given current prices and repo rates.
The composition of the deliverable basket changes over time as Treasury securities age into or out of the eligibility window. A 10-year note issued several years ago progressively shortens in remaining maturity; it might qualify for the 10-year futures basket early in its life, then transition into the 5-year futures basket as it ages, and eventually fall below all futures basket eligibility thresholds as it approaches maturity.
For futures traders and portfolio managers, understanding the current basket composition is essential for several reasons. First, the cheapest-to-deliver bond within the basket is the primary driver of futures pricing. Second, delivery option value — the economic value to the short of being able to choose which bond to deliver — is embedded in the futures price and represents a discount to the naive forward price of the CTD. Third, the possibility that the CTD switches to a different basket member creates basis risk for hedges constructed using futures.
Changes in basket composition are also a source of demand for specific Treasury issues. Primary dealers and hedge funds track which securities are about to enter or leave the deliverable basket, as eligibility changes can materially affect the relative supply-demand dynamics and thus the yield of specific issues.