Cheapest to Deliver (CTD): Definition, Calculation, and 2025 Insights

The world of bond futures might seem technical, but if you’re investing in Australian government securities or trading futures on the ASX, you’ll encounter the term ‘cheapest to deliver’ (CTD). This isn’t just jargon—it’s the linchpin of how bond futures settle, impacting hedging, arbitrage, and the day-to-day strategies of fixed income professionals. With Australia’s government bond market expanding and ASX 3- and 10-year Treasury bond futures remaining highly liquid in 2025, understanding CTD is more relevant than ever.

What is Cheapest to Deliver (CTD)?

When a bond futures contract approaches expiry, the seller must deliver a physical bond from a list of eligible securities. Not all bonds are created equal: each has its own coupon, maturity, and market price. The ‘cheapest to deliver’ is the eligible bond that allows the seller (short position) to fulfil their contract at the lowest cost. This calculation is vital because it shapes the pricing of bond futures, the effectiveness of hedges, and the profitability of arbitrage strategies.

Key features of CTD:

• Defined by contract: Each bond futures contract specifies a basket of eligible government bonds.

• Seller’s choice: The short party can choose which eligible bond to deliver, typically opting for the CTD.

• Dynamic: The CTD can change as market prices, yields, and interest rates fluctuate.

For example, on the ASX 10-year Treasury bond futures in early 2025, eligible bonds include several Commonwealth Government Securities (CGS) with maturities between 8.5 and 11 years. Depending on yield movements, the CTD could shift from a 2033 maturity to a 2034 issue within weeks.

How is the CTD Calculated?

At the heart of the calculation is the ‘net cost’ of delivering each eligible bond, factoring in the bond’s market price, accrued interest, and the futures contract’s ‘conversion factor’—a number that standardises the value of different bonds for delivery purposes.

CTD Calculation Formula for 2025:

Net Cost = (Bond Price – (Futures Price × Conversion Factor)) + Accrued Interest Where:

• Bond Price: Clean price of the eligible bond in the market

• Futures Price: Settlement price of the futures contract

• Conversion Factor: Published by the ASX, it aligns bonds of various coupons and maturities for fair delivery

• Accrued Interest: Interest accrued since the last coupon payment, payable by the buyer

The bond with the lowest net cost is the CTD. In 2025, the ASX continues to publish daily conversion factors for all eligible deliverables. For example, suppose the futures price is 98.75, and two eligible bonds have the following details:

• Bond A: Price $105, Conversion Factor 1.0625, Accrued Interest $1.50

• Bond B: Price $103, Conversion Factor 1.0480, Accrued Interest $1.20

Calculate net cost for each, and whichever is lower is CTD. This process is repeated by traders daily as market conditions shift.

Why CTD Matters in Today’s Australian Bond Market

CTD isn’t just academic. It impacts real-world trading, hedging, and risk management:

• Hedging: Fund managers and super funds using bond futures to hedge portfolios must track CTD to ensure their hedge ratios remain accurate as the CTD changes.

• Arbitrage: Professional traders exploit price anomalies between the CTD bond and the futures contract, especially when volatility rises (as seen in the March 2025 RBA rate shift).

• Valuation: The CTD bond’s yield anchors the fair value of the futures contract—if the CTD switches, futures prices can jump even if overall yields are steady.

In 2025, with the RBA’s ongoing review of government bond market functioning and increased retail access to bond ETFs, CTD awareness is spreading beyond institutional desks. Even for those not directly delivering bonds, understanding CTD helps explain futures price movements, basis risk, and the occasional disconnect between futures and spot bond markets.

Australian Market Example: CTD in Action (2025)

Consider an ASX 10-year Treasury bond futures contract expiring in June 2025. As of May 2025, the eligible bonds are:

• Australian Government Bond 4.25% 21 April 2033

• Australian Government Bond 3.75% 21 April 2034

• Australian Government Bond 4.50% 21 April 2032

Suppose the 2033 bond is trading at a slight premium due to demand from overseas investors, but after applying the conversion factor and accounting for accrued interest, the 2034 bond becomes the CTD. This can prompt a shift in trading volumes, and arbitrageurs will adjust their strategies accordingly. The ASX and major brokers provide daily CTD calculations and updates, and in 2025, several fintech platforms now offer CTD tracking as part of their bond analytics dashboards.

Conclusion

The concept of ‘cheapest to deliver’ may sound niche, but it’s a core driver of Australia’s bond futures market. For anyone involved in fixed income trading, portfolio management, or even just following ASX bond futures, knowing how CTD is determined and why it matters can give you an edge in understanding price movements and managing risk. As government bond issuance and futures trading evolve in 2025, CTD remains a vital concept for all serious market participants.