1. Report Industry Investment Rating - The industry investment rating includes "Stronger than the Market" (the industry index is expected to outperform the CSI 300 Index by more than 5% in the next 6 months), "Neutral" (the industry index is expected to perform within ±5% of the CSI 300 Index in the next 6 months), and "Weaker than the Market" (the industry index is expected to underperform the CSI 300 Index by more than 5% in the next 6 months) [53] 2. Core Viewpoints of the Report - The report serves as an introductory manual for treasury bond futures, covering basic concepts such as varieties, contracts, delivery systems, and fundamental terms like conversion factors, basis, the cheapest-to-deliver bond, and implied interest rates [2][3] 3. Summary by Relevant Catalogs PART1: Initial Understanding of Treasury Bond Futures - **Four Varieties**: There are four varieties of treasury bond futures in China: 2-year (TS), 5-year (TF), 10-year (T), and 30-year (TL), with different contract specifications including contract value, deliverable bonds, minimum price change, daily price limit, and minimum trading margin [2][9][10] - **Four Contracts**: Each variety has 4 fixed contracts per year with delivery months fixed as quarterly months (March, June, September, and December). Only the nearest three contracts can be traded, namely the current-quarter, next-quarter, and far-quarter contracts. The most actively traded contract is the main contract, usually the current-quarter contract, and the main contract switches around 20 - 30 days before the last trading day of the current-quarter contract [14] - **Physical Delivery System**: China's treasury bond futures adopt physical delivery, using both "rolling delivery" and "centralized delivery." Rolling delivery allows the short side to submit delivery applications daily starting from the contract expiration month, and the CFFEX selects appropriate long sides for matching. Unclosed positions on the delivery day enter the centralized delivery process [15] - **Development of China's Treasury Bond Futures Market**: The 5-year treasury bond futures contract was launched in September 2006, the 10-year in March 2015, the 2-year in August 2018, and the 30-year in April 2023. Public funds and securities companies started participating in 2013, while commercial banks and insurance institutions began in 2020 [20] - **Investor Participation Modes**: Banks, insurance companies, and public funds mainly use treasury bond futures for hedging, while securities companies have more flexible trading strategies [22] PART2: Several Basic Concepts of Treasury Bond Futures - **Conversion Factor**: It is the conversion ratio between real treasury bonds and the virtual nominal standard bond. Calculated by discounting all future cash flows of the cash bond to the treasury bond futures delivery date at a 3% rate, it remains unchanged during the contract period. Bonds with a coupon rate greater than 3% have a conversion factor greater than 1, and vice versa [3][28][29] - **Basis and Net Basis**: The basis (B) = cash bond net price - treasury bond futures price * CF, and the net basis (BNOC) = basis - holding period return. The net basis can better measure the actual profit and loss from the spot-futures difference. The basis generally converges to 0 at contract expiration, and a high basis may indicate an overvalued cash bond and an undervalued futures, and vice versa [3][32][35] - **Cheapest-to-Deliver Bond (CTD)**: The CTD is the bond with the lowest delivery cost selected by the short side. Methods to find the CTD include the IRR method (the bond with the highest IRR is the CTD), the net basis method (the bond with the lowest net basis is the CTD), and empirical rules. The accuracy order is IRR method > basis method > empirical rules [38][42][43] - **Implied Interest Rate (Implied YTM)**: If combined with a selected cash bond, the treasury bond futures price can be regarded as the forward price of the corresponding cash bond. The implied YTM of treasury bond futures represents the forward YTM of the cash bond calculated based on its forward price. The difference between spot and futures yields can reflect whether the spot and futures prices deviate significantly [44][46] PART3: Summary - **Conversion Factor**: It makes various deliverable bonds comparable, enriches deliverable bond varieties, and enhances market efficiency [49] - **Basis**: Measures the price difference between the spot and futures markets to find over - or under - valued opportunities [49] - **Net Basis**: Represents the actual arbitrage space after deducting holding returns, closer to the actual return of spot - futures arbitrage [49] - **Implied Repurchase Yield (IRR)**: Used to evaluate risk - free arbitrage opportunities [49] - **Cheapest - to - Deliver Bond (CTD)**: Serves as the benchmark for futures pricing and affects futures price trends [49] - **Implied Interest Rate**: Helps predict market interest rate trends and assist in cash bond investment decisions [49]

Report Industry Investment Rating No relevant content provided. Core Viewpoints - The recent significant correction in the Treasury bond futures market, along with the upcoming issuance of multiple new Treasury bonds from late August to September, and the impact of the VAT recovery policy, may affect the pricing of CTD bonds in Treasury bond futures and change contract prices. This report explores the switching boundaries of CTD bonds from a quantitative perspective and calculates their impact on futures prices [2]. Summary by Related Catalogs Two Ways to Judge CTD Bonds - Based on the rule of thumb, for deliverable bonds with a yield above 3%, the deliverable bond with the longest duration is the CTD bond; for those with a yield below 3%, the one with the shortest duration is the CTD bond [2]. - The deliverable bond with the smallest basis (net basis) or the largest IRR is the CTD bond. IRR is the annualized return of buying the spot and short - selling the futures until contract delivery. The higher the IRR, the more likely the bond is the CTD bond, and the basis/net basis is inversely correlated with IRR [3]. Quantitative Calculation Methods for CTD Bond Switching Method One - Calculate the increase in the primary issuance rate required for CTD bond switching by estimating the price difference. This method is simple but does not consider the conversion factor [4]. Method Two - Calculate the basis of different deliverable bonds considering the conversion factor. The conversion factor is calculated according to the formula provided by the CFFEX, and it remains unchanged during the contract's life. The basis formula is: basis = deliverable bond net price - futures price × conversion factor [5][6][8]. - Consider the coupon compensation after VAT collection. Assuming a 3% VAT rate for government bond issuance, the coupon compensation formula is given. After considering coupon compensation, the conversion factors of new bonds in each Treasury bond futures contract increase [7]. Results of CTD Bond Switching Calculation - If the coupon compensation is calculated at a 3% VAT rate, the T2512 and T2603 contracts face a high probability of CTD bond switching, with price impacts of approximately 1.03 yuan and 1.11 yuan respectively. - If the coupon compensation is calculated at a 6% VAT rate, the TS2512 and TF2512 contracts have a certain probability of CTD bond switching, with price impacts of 0.05 yuan and 0.06 yuan respectively, while the T2512 and T2603 contracts have a higher probability of switching, with price impacts of 1.34 yuan and 1.42 yuan respectively [8][10].

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.