Cheapest to Deliver (CTD)

What Is Cheapest to Deliver?

Cheapest to deliver, or CTD, is the eligible security or commodity that a short futures seller can deliver at the lowest economic cost under the contract's delivery rules. The concept is especially important in Treasury bond and note futures, where several deliverable securities may satisfy the contract.

The futures seller does not simply choose the lowest-priced bond. Delivery economics depend on the cash price, accrued interest, conversion factor, financing cost, and embedded delivery options.

How CTD Works

A physically deliverable futures contract usually allows a range of assets to be delivered. In Treasury futures, eligible bonds or notes differ by coupon, maturity, and price. The exchange uses conversion factors to standardize delivery values, but the short still has an incentive to choose the cheapest eligible issue.

The CTD is the asset that produces the most favorable economics for the short after comparing the cost of acquiring the bond with the invoice amount received through the futures delivery process.

Basic Comparison

A simplified net basis measure is:

In practice, analysts also consider accrued interest, financing, delivery timing, repo rates, and option value. The lowest net basis is often associated with the CTD, but professional analysis may use richer measures such as implied repo.

What Traders Watch

The CTD is especially important when a futures position is being used to hedge a real bond portfolio. If the hedge behaves like the CTD but the portfolio has different duration, coupon, liquidity, or curve exposure, the hedge can leave residual risk even when the futures position is sized carefully.

CTD affects how Treasury futures are priced. The futures contract is economically linked to the deliverable basket, but the cheapest-to-deliver bond often anchors pricing. If the CTD changes, hedge ratios and basis relationships can shift.

Bond portfolio managers, futures traders, and risk managers watch CTD because a futures hedge may behave more like the CTD than like an average bond in the deliverable basket. Duration, convexity, and yield changes can alter which bond is cheapest.

Delivery Optionality

The short futures position often has choices about what to deliver and when to deliver within the delivery window. Those choices have value. The CTD framework helps evaluate that value because the short will generally choose the least costly acceptable delivery.

That optionality means futures pricing is not just a clean interest-rate bet. It includes contract mechanics that can matter around delivery months and changing rate environments.

Delivery Assumptions to Check

CTD is not fixed forever. A bond that is cheapest today may not remain cheapest if yields move, financing costs change, or the futures price changes. A hedge built around the wrong deliverable assumption can drift.

The calculation can also be sensitive to details. Accrued interest, settlement dates, repo specials, taxes, and delivery timing can all affect real economics.

Example of the Tradeoff

Two eligible Treasury bonds may both satisfy the contract, but one may be cheaper to buy relative to the invoice amount generated by its conversion factor. The short will generally prefer that bond, even if another deliverable bond has a lower clean price. The economic comparison is about delivery value after contract mechanics, not sticker price alone.

The Bottom Line

Cheapest to deliver is the eligible deliverable asset that minimizes the short futures seller's delivery cost. It is essential in Treasury futures because CTD behavior can drive futures pricing, basis risk, hedge performance, and delivery strategy.