Why is the 20 yr prices higher than the 2

[SCFX]

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]

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.

 

[SCFX]

Thanks for taking the time Martinghoul, somewhat makes sense.

Cheers Charlie

 

[Martinghoul]

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.