Gross Basis

Gross basis is the most direct measure of the relationship between a specific Treasury security and the futures contract into which it is deliverable. The calculation is straightforward: Gross Basis = Cash Clean Price - (Futures Price x Conversion Factor). A positive gross basis means the cash bond is more expensive than the futures-implied value, while a negative gross basis would imply the futures is overpriced relative to the cash bond — a condition rarely sustained in practice due to arbitrage.

Gross basis exists in equilibrium primarily because of carry: over the period between the trade date and the futures delivery date, the holder of the cash bond earns coupon interest but also pays repo financing costs. If coupons exceed repo costs — positive carry — the cash bond holder is compensated for owning the physical security rather than the futures, justifying a positive gross basis. If repo costs exceed coupon income — negative carry, common in inverted yield curve environments — the gross basis should narrow or even go negative in theory.

Gross basis is calculated and reported separately for each bond in the deliverable basket. The basket bond with the lowest gross basis adjusted for conversion factor differences is generally a strong candidate for CTD status, since it represents the bond the market views as most fairly valued relative to the futures contract delivery mechanics.

In practice, gross basis is tracked in real time by trading systems at all major fixed income desks. Changes in gross basis provide immediate signals about shifts in the relative demand for cash versus futures Treasury exposure. When cash Treasuries become scarce — due to settlement fails, repo market stress, or exceptional demand from specific investor types — gross basis widens as the cash price premium increases. Conversely, when futures positioning is heavy and cash supply is ample, gross basis tends to compress.

Gross basis should not be used in isolation to assess the attractiveness of a basis trade, because it ignores the carry component. Two bonds with identical gross basis but different coupons and maturities will have very different net basis profiles. The full analysis of basis trade attractiveness requires computing net basis and comparing it to an estimate of the fair value of the delivery option embedded in the futures contract.