1. Report Industry Investment Rating No relevant information provided. 2. Core View of the Report The report focuses on the cost - effectiveness and application prospects of the long - substitution strategy for the 30 - year Treasury bond futures (TL contract). By comparing the net - price trends, basis structures, and holding - return differences between the CTD bond of the TL contract and various spot targets, the report validates the feasibility of the long - substitution strategy. Back - testing shows that the strategy with the implied spread signal performs best, achieving annualized excess returns of 1.35%, 0.81%, and 1.05% for the 30 - year active bond, ChinaBond 30 - year Treasury bond index, and 30 - year Treasury bond ETF respectively. The TL contract can provide a more flexible allocation plan for investors [1][3][80]. 3. Summary According to the Table of Contents I. Current Cost - Effectiveness of the TL Contract as a Spot Long - Substitution (1) Net - Price Trend Correlation between the CTD Bond of the TL Contract and the 30 - Year Treasury Bond Active Bond/Index - The CTD bond of the TL contract is currently anchored to the 30 - year old bond. Its duration is shorter, yield is higher, and coupon rate is significantly higher than those of the 30 - year active bond and the ChinaBond 30 - year Treasury bond index. - In general, the net - price trends of the CTD bond of the TL contract and the 30 - year active bond/new index are similar. When the spread between new and old bonds narrows or widens significantly, differences may occur. In the case of a narrowing spread between new and old bonds and rising/volatile interest rates, the net - price trend of the CTD bond of the TL contract may be stronger than that of the 30 - year active bond/index; conversely, it may be weaker [2][9][11]. (2) Comparison of the Basis of the TL Contract and the Holding Returns of the 30 - Year Treasury Bond Active Bond/Index - The basis of the TL contract can be split into the holding return of the CTD bond and the net basis. The holding return accounts for a relatively high proportion in the basis pricing. - The coupon rate of the CTD bond of the TL contract is significantly higher than those of the 30 - year active bond and the ChinaBond 30 - year Treasury bond index. The net basis of the TL contract fluctuates greatly, increasing the probability of higher "coupon - like" returns compared to the 30 - year active bond/index [12][17][20]. (3) Rule Summary - The CTD bond of the current TL contract is anchored to the 30 - year old bond, with a shorter duration, higher yield, and higher coupon rate. - The TL contract is likely to have higher "coupon - like" returns than the 30 - year active bond/index. Assuming that the 30 - year Treasury bond interest rate does not rise close to 3% in the short term, the feature of the TL contract being anchored to the relatively high - coupon old bond is expected to continue [25][26]. II. Back - testing of the Long - Substitution Strategy (1) Comparison of Rolling Long - Position Returns between Futures and Spot - By comparing the continuous holding returns and risk performance of the TL Treasury bond futures contract, the 30 - year active bond, and the ChinaBond 30 - year Treasury bond index in the same back - testing period, the cost - effectiveness of the futures tool in a simple long - position allocation scenario can be intuitively judged. - Without considering capital costs, the annualized return of continuously holding the TL contract is only 0.66% lower than that of the 30 - year active bond. The difference between the annualized return of the ChinaBond 30 - year Treasury bond index and that of continuously holding the TL contract is small, indicating the feasibility of further back - testing the long - substitution strategy [29][31]. (2) Signal and Strategy Construction - Signal types: Three signals are constructed, including the historical quantile of the basis level, the "minimum" threshold for the basis convergence of futures converted from the spot holding return, and the superposition of the first two signals. - Strategy construction: Based on the above signals, a long - substitution strategy is back - tested on the TL contract. The futures closing date is set as the second - last trading day of the month before the futures contract delivery month. The spot targets include the 30 - year Treasury bond active bond, ChinaBond 30 - year Treasury bond index, and 30 - year Treasury bond ETF. The strategy also involves capital management and a specific back - testing time interval [32][34][37]. (3) Back - testing of the Futures Long - Substitution Strategy - For the 30 - year Treasury bond active bond, the implied spread signal performs best. The annualized return of signal 1 and the superposition signal is 11.74%, 1.35% higher than holding the 30 - year Treasury bond active bond, with better risk - return ratios. - For the ChinaBond 30 - year Treasury bond index, the implied spread signal 1 and the superposition signal also perform best, with an annualized return of 12.45%, 0.81% higher than holding the index, and better risk - control and risk - return indicators. - For the 30 - year Treasury bond ETF, using the implied spread signal, signal 1 and the superposition signal achieve an annualized return of 12.15%, 1.05% higher than holding the ETF [37][54][73]. (4) Conclusion - The TL contract can be regarded as a substitute for the 30 - year old Treasury bond. The long - substitution strategy with the implied spread as the core signal can effectively optimize asset - allocation efficiency, providing a differentiated allocation plan for investors, especially suitable for index - based assets such as the ChinaBond 30 - year Treasury bond index and 30 - year Treasury bond ETF [80].

Group 1: Report Industry Investment Rating - Not provided Group 2: Core Viewpoints of the Report - After achieving duration neutrality in cross - variety arbitrage, the market aims to earn term spread returns, but the net basis often has a greater impact on the portfolio value. The report tries to help investors solve this problem by finding the net basis rules of different portfolios [3] - The fluctuations of the duration - neutral cross - variety arbitrage portfolio mainly come from term spread and net basis fluctuations. The net basis fluctuation dominates the impact on the overall value. After subtracting the net basis, the portfolio value fluctuation fits the term spread better, indicating that the net basis is the main factor affecting the portfolio's tracking of the term spread [4] - The short - term fluctuations of the portfolio's net basis have weak regularity, but in the long run, it has certain characteristics. It has a fixed historical fluctuation range and mean - reversion characteristics. Curve trading can be considered when the net basis is at a historical high or low to avoid potential impacts [5] Group 3: Summary by Relevant Catalog 1. Cross - Variety Arbitrage's Duration Neutrality 1.1 Portfolio Value Fluctuations Mainly Come from Basis and Term Spread - Since May, the short - end of government bonds has been stable, and the long - end has adjusted significantly, with term spreads widening. Common arbitrage portfolios have significant duration gaps, so a portfolio without a duration gap is considered to track the term spread. When a×D(A)×A = b×D(B)×B, the portfolio's duration is 0 [10][12] - To keep the arbitrage portfolio duration - neutral, the position ratio of the varieties in the portfolio should be adjusted over time, but it is difficult to do so daily in practice [15] - To observe the impact of net basis fluctuations on portfolio value, a duration - neutral arbitrage portfolio is created near the main contract switching date and tracked until the next switch. The portfolio ratio remains unchanged during this period [20] - After achieving duration neutrality, the portfolio's value fluctuations mainly come from tracking term spreads and net basis fluctuations. The net basis causes portfolio value changes. From 2018 to now, except for 2020, the price fluctuations of most arbitrage portfolios in the main contracts within 3 months are usually within 1 yuan, and the net basis fluctuations are usually within 0.6 yuan. The net basis amplitude often reaches 100% - 200% of the portfolio price amplitude, and since the 2412 contract, this proportion has decreased but remains high [22][24] - The correlation between portfolio value and net basis is unstable. Due to net basis disturbances, the arbitrage portfolio often deviates from tracking term spreads, but after subtracting the net basis, the tracking effect is greatly improved [33][37][39] 1.2 What Are the Disturbing Factors of the Net Basis? - In the strategy of rotating every 3 months, the net basis is the main disturbing factor. In 2024, bond market interest rates were positively correlated with the net basis, but since 2025, the trend has diverged. Since May 2025, there has been a certain negative correlation [42] - The net basis of the portfolio is generally positively correlated with the funding rate, but the rule for the T - TL portfolio is unstable, possibly due to the stronger trading nature of the TL contract [42] - Trading activity is positively correlated with the portfolio's net basis in the general trend, and the rule is more obvious when measured by trading volume divided by open interest. The T - TL rule is relatively less obvious [53] - Similar to the net basis of a single variety, the portfolio's net basis has cyclical fluctuations and mean - reversion characteristics. Curve trading can be considered when the net basis reaches a historical high or low [53] 2. Cross - Variety Arbitrage Example - The 30Y - 7Y term spread has widened since early June. A cross - variety arbitrage portfolio was created on May 30 to track it. From May 30 to August 21, the term spread widened by 5.25bp, the futures portfolio value increased by about 0.03 yuan, and the net basis caused a loss of about 0.06 yuan, accounting for 63% of the loss. The net basis on May 30 was not at an extreme value, and interest rate increases during the period led to potential net basis declines and additional losses [62][64]

1. Report Industry Investment Rating No relevant content provided. 2. Core Views - The report is an introductory guide to treasury bond futures, providing a detailed introduction to the characteristics and related concepts of each treasury bond futures variety, and offering an analysis framework for investors to understand the relationship between the spot and futures markets, identify arbitrage opportunities, and manage interest rate risks [11]. 3. Summaries According to the Table of Contents 3.1 Treasury Bond Futures Basic Varieties - There are four treasury bond futures varieties listed on the China Financial Futures Exchange, with different contract specifications such as contract value, deliverable bonds, and margin requirements. The 2 - year treasury bond futures has a contract value of 2 million yuan, while the others have 1 million yuan. The shorter - term futures have lower minimum margin ratios and higher leverage [12]. - Each variety has four fixed contracts per year with delivery months in March, June, September, and December, but only the nearest three quarterly contracts are traded. The settlement price is the net price excluding accrued interest [12]. - In terms of trading volume and open interest, the 10 - year variety has the largest open interest, followed by the 5 - year and 30 - year varieties, and the 2 - year variety has the lowest. The 30 - year variety has a relatively high trading volume and a leading trading volume ratio [13][15]. 3.2 Treasury Bond Futures Basic Concepts - The basic concepts include the main contract, continuous contract, deliverable bonds, conversion factors, CTD (cheapest - to - deliver bond), treasury bond futures pricing, basis, net basis, and implied repo rate (IRR), which together reveal the arbitrage opportunities and the internal relationship between the spot and futures markets [20]. 3.3 Main Contract - The main contract is the one with the largest trading volume, open interest, and market influence in a certain variety, usually the current - quarter contract. As the current - quarter contract approaches the delivery month, its trading volume decreases, and the next - quarter contract takes over as the new main contract [21]. 3.4 Continuous Contract - The continuous contract is a virtual contract sequence created to connect the prices of individual treasury bond futures contracts with different maturity months, facilitating technical analysis, back - testing research, and long - term trend observation [22]. 3.5 Deliverable Bonds and Conversion Factors - To standardize and ensure the continuity of treasury bond futures, a virtual standard bond is used as the contract underlying, and the conversion factor is introduced to standardize different deliverable bonds. The invoice price in actual delivery is calculated based on the futures settlement price, conversion factor, and accrued interest [25]. 3.6 CTD (Cheapest - to - Deliver Bond) - The CTD is the bond with the lowest delivery cost among the deliverable bonds, which can be determined by calculating the delivery net cost. Its selection is affected by factors such as conversion factors, market interest rate fluctuations, and bond liquidity [33][35]. 3.7 Treasury Bond Futures Pricing - Treasury bond futures are priced based on the "no - arbitrage principle." The theoretical price is equal to the net cost of holding the CTD spot until delivery, considering factors such as the spot net price, financing cost, and interest income. The pricing also takes into account the seller's option value [41]. 3.8 Basis - The basis represents the difference between the spot price and the futures price of treasury bonds, reflecting the "holding cost" or "return" of holding spot treasury bonds and hedging through short - selling futures contracts. It is affected by factors such as interest income, financing cost, and short - seller option value [42][43]. 3.9 Net Basis - The net basis is the basis after deducting the holding - period net return, directly reflecting the short - seller option value of a certain type of futures and helping to identify "cheap" futures varieties [44][45]. 3.10 Implied Repo Rate (IRR) - The IRR is the theoretical annualized return rate of the basis trading strategy of "buying spot bonds and selling futures." When the IRR is higher than the actual financing cost, there is a positive arbitrage opportunity; otherwise, there may be a reverse arbitrage space. The CTD bond usually has the highest IRR [48].

1. Report Industry Investment Rating No relevant content provided. 2. Core View The report is an introductory guide to treasury bond futures, detailing the characteristics and concepts of various treasury bond futures products, which offer efficient and flexible interest rate risk hedging tools for financial market participants, deepening China's bond market and promoting the process of interest rate liberalization [11]. 3. Summary by Directory 3.1 Treasury Bond Futures Basic Varieties - There are 4 treasury bond futures products listed on the China Financial Futures Exchange, covering different maturities. Each product has 4 fixed contracts per year with delivery months in March, June, September, and December, but only the nearest three quarterly contracts are traded [12]. - The contract underlying the 2 - year treasury bond futures has a face value of 2 million yuan, while the others have a face value of 1 million yuan, all with a nominal coupon rate of 3%. Shorter - term futures have lower minimum margin ratios, with the 2 - year futures at 0.5% (200 - fold leverage) and the 30 - year at 3.5% (28 - fold leverage) [12]. - In terms of open interest, the 10 - year futures has the largest scale (280,000 lots), followed by the 5 - year and 30 - year (180,000 lots), and the 2 - year has the lowest (80,000 lots). In 2025, the average daily trading volumes of the 2 - year, 5 - year, 10 - year, and 30 - year futures were 40,000, 70,000, 90,000, and 120,000 lots respectively, with the long - term varieties having relatively higher trading volumes and the 30 - year having a leading trading proportion [13][15]. 3.2 Treasury Bond Futures Basic Concepts - The concepts include the main contract, continuous contract, deliverable bonds, conversion factors, CTD (cheapest - to - deliver bond), treasury bond futures pricing, basis, net basis, and implied repo rate (IRR), which together reveal arbitrage opportunities and market relationships [20]. 3.3 Main Contract - The main contract is the one with the largest trading volume, open interest, and market influence in a particular variety, reflecting market expectations and supply - demand relationships for interest rates. It is usually the current - quarter contract due to high hedging and arbitrage demand and optimal liquidity. When the current - quarter contract approaches the delivery month, the next - quarter contract takes over as the main contract [21]. 3.4 Continuous Contract - The continuous contract is a virtual contract sequence created to connect the prices of individual treasury bond futures contracts with different maturities, facilitating technical analysis, back - testing, and long - term trend observation. Wind uses the "post - adjustment method" to eliminate price gaps during contract switching [22]. 3.5 Deliverable Bonds and Conversion Factors - To ensure standardization and continuity of treasury bond futures, the contract underlying is a virtual standard bond. The conversion factor is used to standardize different deliverable bonds, calculated as the present value of a deliverable bond's future cash flows discounted at the coupon rate of the virtual standard bond and divided by the face value. The invoice price in actual delivery is calculated as the futures settlement price × conversion factor × face value+accrued interest [25]. 3.6 CTD (Cheapest - to - Deliver Bond) - CTD is the bond with the lowest delivery cost among the basket of deliverable bonds, determined by calculating the delivery net cost (bond market price - (futures settlement price × conversion factor)). Its influencing factors include conversion factors, market interest rate fluctuations, and bond liquidity. Empirically, when the market yield > 3%, low - coupon, long - duration bonds are more likely to be CTD; when < 3%, high - coupon, short - duration bonds are more likely [33][35][36]. 3.7 Treasury Bond Futures Pricing - Pricing is based on the "no - arbitrage principle." In an efficient and frictionless market, the futures settlement price = spot bond net price+interest income - financing cost - coupon income. Considering the seller's option value in the delivery rules, the actual formula is futures settlement price+option value = spot bond net price+interest income - financing cost - coupon income [39][41]. 3.8 Basis - The basis in treasury bond futures represents the "holding cost" or "return" of holding a spot treasury bond and hedging through short - selling futures contracts. It is calculated as the net price of the deliverable bond - (futures settlement price × conversion factor of the deliverable bond), and is affected by interest income, financing cost, and short - seller option value [42][43]. 3.9 Net Basis - The net basis is the basis minus the net return during the holding period, directly reflecting the short - seller option value of a particular futures variety, with the CTD having the highest net basis [44][45]. 3.10 Implied Repo Rate (IRR) - IRR measures the theoretical annualized return of a basis trade ("buy spot, sell futures") held until delivery. When IRR > market risk - free rate, there is an arbitrage opportunity; when <, there may be a reverse arbitrage opportunity, but it is not risk - free. The CTD has the highest IRR [48].

Group 1 - The article discusses common arbitrage combinations such as TS*2-TF, TS*4-T, TF*2-T, and T*3-TL, which often deviate from the corresponding cash bond yield spread trends due to not achieving duration neutrality, thus failing to immunize against interest rate risk [2][7][20] - It highlights the importance of considering interest rate fluctuations when tracking yield spreads with these arbitrage combinations, suggesting that an ideal approach is to gain potential returns from both yield spreads and unilateral volatility [2][19] - The current duration gaps for various combinations indicate that if interest rates are expected to decline, attention should be paid to opportunities in the 7Y-5Y yield spread narrowing or the 5Y-2Y and 30Y-7Y yield spreads widening [2][20][21] Group 2 - The article emphasizes that the net basis can significantly impact the short-term performance of arbitrage combinations, advising that when constructing these combinations, the overall net basis level should be considered [2][15][17] - It notes that the historical performance of net basis fluctuations has been limited to a range of ±1 yuan, with recent trends showing a convergence to around ±0.5 yuan, indicating a reduced impact on combination value [15][17] - The report suggests that when engaging in curve shape arbitrage, it is crucial to consider both the current yield spread position and the duration gap, as well as the expected direction of future interest rate movements [19][20][26]

Summary of Key Points from Conference Call Industry Overview - The conference call discusses the **government bond futures market** and its trading strategies, highlighting its role in risk management and investment opportunities [1][2][3]. Core Insights and Arguments - **Characteristics of Government Bond Futures**: - Features include short-selling mechanisms, margin trading, standardized contracts, and daily mark-to-market settlement, which help mitigate interest rate risks, lower transaction costs, enhance liquidity, and reduce credit risks [1][2]. - **Functions of Government Bond Futures**: - Key functions include hedging against interest rate fluctuations, price discovery, linkage between primary and secondary markets, and optimizing asset allocation [1][2][3]. - **Types of Government Bond Futures in China**: - China has introduced futures for 2-year, 5-year, 10-year, and 30-year government bonds, covering critical maturities. Each contract corresponds to different remaining maturity ranges, with longer maturities having wider price fluctuation limits and higher minimum margin requirements [1][4]. - **Basis and Net Basis**: - Basis is the difference between the cash bond price and the futures price adjusted for the conversion factor, serving as an important indicator for analyzing arbitrage opportunities. Net basis considers holding income, which is crucial for selecting the cheapest deliverable bond (CTD) [1][7][10]. - **Market Participants**: - Main participants in the government bond futures market include brokerage firms, asset management products (like public funds and private equity), individual investors, and some banks and insurance companies. The market has seen steady growth in trading volume and open interest since 2023 [5][6]. Additional Important Content - **Hedging Strategies**: - Hedging strategies include short and long hedges to manage interest rate risks. The process involves selecting contracts, calculating hedge ratios, dynamically adjusting positions, and managing rollovers [2][12][13]. - **Risks in Hedging**: - Risks faced during hedging include basis risk, financing spread volatility, and term mismatch risk. These risks arise from the imperfect correlation between the swap contract indicators and actual yields [17][27]. - **Interest Rate Swaps**: - Interest rate swaps are over-the-counter financial contracts that help manage interest rate risk by exchanging fixed and floating interest payments. They can also be used for speculation and cost reduction [21][22]. - **Arbitrage Opportunities**: - Arbitrage strategies in the futures market include directional trading and relative value strategies, such as term arbitrage and cross-asset strategies [19][28][29]. - **Risks in OTC Contracts**: - OTC contracts carry additional risks compared to exchange-traded contracts, including credit, operational, and valuation risks. Market risk arises if actual market conditions deviate from expectations [30]. This summary encapsulates the essential aspects of the government bond futures market and its associated trading strategies, highlighting both opportunities and risks for market participants.

Summary of Key Points from the Conference Call Industry Overview - The conference call focuses on the **government bond futures** market in China, detailing the mechanics, strategies, and key indicators relevant to trading in this sector. Key Points and Arguments 1. **Contract Specifications**: Government bond futures are categorized into four types based on maturity: 2-year (200 million RMB), 5-year, 10-year, and 30-year (100 million RMB). Daily price fluctuation limits are set at ±0.5%, ±1.2%, ±2%, and ±3.5% respectively [1][4]. 2. **Pricing Mechanism**: There is a reciprocal pricing relationship between the government bond spot market and the futures market. Technical analysis can predict trends and inform spot market transactions [5]. 3. **Key Indicators**: Important indicators include the main contract, cheapest to deliver (CTD) conversion factor, basis, net basis, bank repurchase rate, trading volume, and open interest. These indicators help assess market activity and identify arbitrage opportunities [8][9]. 4. **Basis and Net Basis**: The basis is defined as the difference between the spot price and the futures price adjusted by the conversion factor. A positive basis indicates futures are at a discount, while a negative basis indicates a premium. The net basis accounts for holding period returns, providing a clearer picture of investment profitability [3][13]. 5. **Trading Strategies**: Common strategies include speculation, hedging, and arbitrage. Hedging is primarily used by institutions like funds and banks to mitigate interest rate risk [27][28]. 6. **CTD and Conversion Factor**: The CTD is the least expensive bond that can be delivered under a futures contract. The conversion factor standardizes different bonds to a nominal rate of 3% for valuation purposes [11][12]. 7. **Market Sentiment Analysis**: Market sentiment can be gauged through open interest and trading volume. An increase in long positions may indicate bullish sentiment, while an increase in short positions may suggest bearish sentiment [16][26]. 8. **Arbitrage Opportunities**: Arbitrage strategies include basis arbitrage, curve arbitrage, inter-period arbitrage, and cross-product arbitrage. These strategies exploit price discrepancies between futures and spot markets [33][36]. 9. **Impact of Bank Repo Rate**: The bank repurchase rate is crucial for determining the profitability of a positive spread trading strategy, influencing both funding costs and overall returns [14][15]. 10. **Settlement Price Calculation**: The settlement price is derived from a weighted average of transaction prices and volumes throughout the trading day [17]. Additional Important Content - **Contract Rollovers**: The main contract typically undergoes a rollover process around the 18th to 20th of the month prior to expiration, affecting liquidity and trading volume [9]. - **Minimum Trading Margin**: The minimum trading margin varies by contract type, influencing leverage ratios. For instance, the 2-year contract requires a margin of 0.5% of the contract value [4]. - **Market Behavior Indicators**: Observing the nature of trades (opening vs. closing positions) can provide insights into market trends and potential price movements [22][24]. This summary encapsulates the essential aspects of the government bond futures market as discussed in the conference call, providing a comprehensive overview for potential investors and market participants.

Core Viewpoint - The bond futures market in China is experiencing a bull-flat pattern, with expectations of continued support from monetary policy despite potential short-term fluctuations due to external pressures and policy disturbances [3][4]. Group 1: Market Performance - In the first half of the year, bond futures faced pressure, particularly in Q1, with a notable decline, while Q2 saw stabilization, resulting in a wide fluctuation in the ten-year government bond futures [1]. - As of June 27, the most traded T main contract slightly decreased from 109.301 at the beginning of the year to 109.045, and the weighted interest rate for ten-year bonds fell from 1.67% to 1.644% [1]. - The net basis of the bond market showed a convergence from high levels to negative territory from January to March, driven by tightening liquidity, while recovery was noted from April onwards [2]. Group 2: Market Phases - The bond market's trajectory can be divided into three phases: 1. From January 2 to March 17, tightening liquidity led to adjustments in TS and TF, with T and TL also experiencing corrections [2]. 2. From March 18 to April 9, market sentiment improved, leading to a comprehensive rebound due to a marginal easing of liquidity and reduced risk appetite from U.S.-China trade tensions [2]. 3. From April 10 to the present, the market initially declined but later rebounded as trade tensions eased and the central bank injected liquidity through reverse repos [2]. Group 3: Future Outlook - The bond market is expected to maintain a bull-flat pattern in the second half of the year, with inflation constraints supporting a continued loose monetary environment [3]. - The anticipated CPI recovery is unlikely to exceed previous highs, and the current economic environment suggests that actual interest rates may need to remain low to support high-quality economic development [3]. - The trend of narrowing term spreads is expected to continue, driven by a "scarcity of assets" in the residential financial management sector due to cooling expectations in the real estate market [3]. Group 4: Investment Strategies - Investors are advised to adopt two strategies in the bond futures market: buying long-term TL contracts on dips and shorting TS (or TF) while going long on T (or TL) [4]. - The current negative net basis across various contracts suggests potential for positive arbitrage opportunities, although caution is advised in short-term participation due to limited upside in net basis recovery [4].