Why is the 20 yr prices higher than the 2

SCFX

Member
54 0
Hi guys,

I have been looking around for the last couple of hrs to try and understand why the 10 Yr Treasury Futures (TY) contract trades at a higher price than the 2 Yr Treasury Futures contract (TU) or the 5 Yr (FV).

They all have the same 6% coupon and seeing that we have a normal yield curve, the price of the 10 Yr should be lower than the 2 Yr, yet why is the 10 yr at a higher price than the 2 yr? (Yields higher - Prices Lower)

Any help in understanding this would be grateful.

Regards,

Charles
 

Martinghoul

Senior member
2,690 276
In very rough and simplistic terms, think of it this way... Let's say today, when rates are arnd 0, I promise you a 6% coupon for 2 years, how much will you pay me for that today? What if I promised you a 6% coupon for 20 years? PV those two and you should hopefully answer your own question. BTW, this is what the "pull-to-par" effect is all about.
 
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Martinghoul

Senior member
2,690 276
In general, this isn't always true, as it would depend on the term structure... For example, the long-dated gilt futures contract has a lower price than the 10y gilt futures contract.
 
 
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