Net Basis
Net basis is the gross basis of a Treasury bond futures position adjusted for the carry income earned over the holding period — specifically the coupon accrual minus the repo financing cost — isolating the pure optionality value embedded in the futures contract relative to the deliverable cash bond.
While the gross basis measures the raw price difference between the cash bond and the conversion-factor-adjusted futures price, the net basis strips out the predictable carry component to reveal what the market is implying about the delivery options embedded in the futures contract. Net Basis = Gross Basis - Carry, where Carry = Coupon Income Accrued over Delivery Period - Repo Interest Cost over Delivery Period.
Carry is the net income earned by owning the cash bond between the trade date and the futures delivery date. If a bond has a 4.5% coupon and the overnight general collateral repo rate is 5.3%, the carry over a 90-day period is negative: the cost of financing the bond in the repo market exceeds the coupon income received. In such an inverted yield curve environment, carry is negative and the net basis will be higher than the gross basis for a given futures contract.
The sign and magnitude of net basis have direct implications for delivery decisions. A bond with a net basis equal to zero would be perfectly indifferent between cash and futures delivery. In practice, all bonds in the deliverable basket except the CTD have positive net basis, meaning the market prices in a cost to delivering them relative to the CTD. The CTD bond itself has a net basis close to zero but slightly positive due to delivery option value: the futures contract always prices in some possibility that a different bond might become CTD before delivery, providing a small premium to the short.
Net basis is particularly important for understanding the economics of carry trades on the Treasury curve. A positive carry trade — where the coupon exceeds the repo rate — generates income that offsets gross basis, making long basis positions more attractive. In negative carry environments (inverted curves), net basis diverges upward from gross basis, increasing the hurdle rate for long basis positions.
For risk managers, monitoring net basis across the entire deliverable basket provides a real-time picture of which bonds are closest to becoming CTD and how delivery option value is distributed across basket members. Sudden changes in net basis — driven by shifts in repo rates, coupon accrual calendars, or futures positioning — can signal regime shifts in the basis that require repositioning of futures hedges.