Standard Bond Forward Market Practices | Application of Standard Bond Forward Strategies from the Perspective of Securities Firms

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Standard Bond Forward Market Practices | Implementation of Standard Bond Forward Strategies from the Perspective of Securities Firms

Huatai Securities Fixed Income Department

The “15th Five-Year Plan” outlines the goal of accelerating the construction of a strong financial country, improving a multi-tier capital market system, promoting high-quality development of the bond market, steadily developing the derivatives market, building safe and efficient financial infrastructure, and enhancing the capacity to prevent and mitigate risks in key areas. In 2026, in accordance with the People’s Bank of China’s work conference deployment, efforts will focus on strengthening market infrastructure functions, improving risk control systems, and effectively enhancing financial management and service levels, in order to effectively prevent and mitigate financial risks.

Against this backdrop, as an important derivative tool connecting the bond primary and secondary markets, standard bond forwards are of great significance for improving the yield curve, enhancing market liquidity, smoothing interest rate volatility, supporting interest rate risk management, and facilitating price discovery. In recent years, they have increasingly attracted ongoing attention and widespread use from various market institutions. As major issuers of policy bank financial bonds, the China Development Bank and the Agricultural Development Bank of China attach great importance to and actively promote the application and practice of standard bond forward business. Their aim is to optimize asset-liability management through derivatives, and to promote effective linkage between primary market issuance pricing and secondary market risk management.

To better advance business development, the Shanghai Clearing House has launched a special topic titled “Standard Bond Forward Market Practices,” gathering industry insights to conduct in-depth discussions on diverse application scenarios, trading strategies, and practical takeaways for standard bond forwards in the bond market—supporting them in further playing a role in preventing and mitigating financial risks, promoting close integration and deep development between policy bank financial bond and derivatives markets, and enhancing the effectiveness of financial services for the real economy.

With the steady development of China’s bond market, various interest rate derivatives have emerged as well. At present, bond forwards, interest rate swaps, and T-bond futures are the three cornerstones of China’s interest rate derivatives. Among them, since the launch of standard interest rate forwards, they have gradually become one of the core tools used by interbank trading institutions for interest rate market trading, risk management hedging, and structured strategies.

Figure 1 Derivatives Market

1. Advantages of Standard Bond Forwards

Standard bond forwards include cash-settled instruments and physical delivery instruments. Their most important function is to improve the market’s price discovery mechanism. On the X-swap platform, all standard bond forwards are freely bought and sold through an open-bid auction process, concentrating many genuine trading intentions into the futures price—thereby truly reflecting expectations for interest rates. Standard bond forwards have different delivery months. From contract listing to operation, and then to final delisting and entry into delivery, within a complete “life cycle,” the formation mechanism of daily trading prices and settlement prices differs—reflecting price levels at different stages.

Figure 2 Price discovery function of standard bond forwards

Standard bond forwards help improve liquidity in cash bonds. In trading standard bond forwards, activities such as speculation, hedging, and arbitrage increase the market’s participation and activity, thereby improving the liquidity of the underlying cash bonds. In 2025, before the listing of standard bond forward contracts, the average daily number of trades in deliverable securities was 100–150; after listing, it was around 250 per day on average. Although continuously re-issuing deliverable securities during the period and the growing outstanding size are also reasons behind the improvement in cash bond liquidity, the listing of standard bond forward contracts is still an important influencing factor.

Figure 3 Standard bond forwards help enhance cash bond liquidity

In addition, standard bond forwards have the following four major characteristics:

First, standard bond forwards are traded in the interbank market. They are quoted on the X-Swap trading system. Trading services are open, transparent, and continuous, providing the market with more timely and effective price signals.

Second, standard bond forwards are centrally cleared by the Shanghai Clearing House as the central counterparty. Therefore, compared with interest rate swaps that are not received in real time, settlement by the central counterparty does not consume bilateral credit lines. At the same time, standard bond forwards feature integrated trading and clearing: anonymous quotation and matched composite trades via the foreign exchange trading center. If the achieved trade is within the overall position limit, the Shanghai Clearing House receives orders in real time for contract replacement, without the need for trade confirmations. As a result, trading and clearing efficiency is high.

Third, standard bond forwards adopt a margin trading model, requiring less capital, with lower trading costs, standardized delivery processes, and a relative simplicity.

Fourth, the Shanghai Clearing House has also established a rigorous entry mechanism and a continuous monitoring system for its members, resulting in relatively low settlement risk.

2. Hedging function of standard bond forwards

Standard bond forwards can improve hedging efficiency for market participants, and before 2020, they also filled most of the gap that interbank proprietary institutions were unable to participate in the CICC’s T-bond futures (in 2020, T-bond futures opened participation for banks).

The most direct application of standard bond forwards in risk management is hedging strategies. Hedging is divided into perfect hedging and imperfect hedging. Under perfect hedging, the cash bonds held are among the deliverable securities of the standard bond forward contracts. Under imperfect hedging, the maturity date of the hedged bond positions does not fully match the maturity date of the hedging instruments. Since standard bond forwards are based on standardized maturity dates, when using standard bond forwards for hedging, most cases involve duration-based non-perfect symmetric hedging. This implicitly entails duration spread and basis risk.

Figure 4 Schematic diagram of perfect hedging

Figure 5 Schematic diagram of imperfect hedging

From February to March 2025, market expectations for “moderate and slightly accommodative” policy were adjusted, and sentiment in the equity market turned positive. Combined with the stock market rising + the Two Sessions (government’s annual meetings) setting a relatively positive tone, the bond market returned to a positive carry logic. We selected two active 10Y securities—24 CDB 30 and 25 CDB 10—to observe the hedging effectiveness of standard bond forwards (ADBC10_2506) and T-bond futures (T2606).

During the hedging period, the total收益 from using standard bond forwards as the hedging instrument was over 400,000 yuan, while the total收益 from using T-bond futures was over 100,000 yuan.

Table 1 Basic information on the bonds being hedged

Table 2 Hedging result calculations

Further comparisons show that, in terms of the Sharpe ratio and maximum drawdown, the hedging effectiveness of standard bond forwards is clearly better than that of T-bond futures. Theoretical perfect hedging—achieving net value performance under the cost method. Under hedging with standard bond forwards, the net value curve of the portfolio tracks the cost-method net value performance more closely.

Figure 6 Net value curves before and after hedging of 240430

Table 3 Comparison of hedging effectiveness for 240430

Figure 7 Net value curves before and after hedging of 250410

Table 4 Comparison of hedging effectiveness for 250410

Additionally, consider a policy bank bond portfolio rather than individual bonds—that is, evaluate the hedging index effects of standard bond forwards and T-bond futures. By using the CDB-Nongye-Related bond total index wealth (7–10 years) index for hedging comparison, we can also obtain the conclusion that standard bond forwards produce superior hedging effectiveness.

Figure 8 Net value curves before and after hedging using the CDB–Agriculture Development Bank bond total index wealth (7–10 years) index

Table 5 Comparison of hedging effectiveness using the CDB–Agriculture Development Bank bond total index wealth (7–10 years) index

In summary, because the underlying assets of standard bond forwards are policy bank financial bonds, they can better achieve the hedging function for financial bonds than T-bond futures. The product design has advantages in the interbank market. Trading of standard bond forwards runs until 4:30 p.m., meeting market institutions’ need to hedge the risk of cash bond market volatility in the afternoon. Meanwhile, it also adopts the interbank market’s T+1 settlement mode, resulting in a relatively low settlement capital occupation cost.

3. Arbitrage strategies with standard bond forwards

1. Long substitution strategy

Standard bond forwards have a leverage characteristic; therefore, investors only need to pay margin to obtain the corresponding profit and loss based on the bond notional amount. At the same time, investors can invest excess funds into cash-like assets, further increasing overall returns.

From April 11 to July 10 this year, suppose an institution has 100 million yuan to invest in the bond market. It has two choices: one is to buy 10Y CDB bond 250410 entirely; the other is to split the 100 million yuan into 5% of ADBC10_2509 and hold 95% of 3M interbank certificates of deposit (CDs).

When the bond market rallies, the long substitution strategy can generate excess returns greater than simply holding bonds, and it also increases flexibility in the use of capital during the strategy period.

Figure 9 Comparison of effects of the long substitution strategy

Table 6 Comparison of effects of the long substitution strategy

2. Cross-period strategy

The core of a cross-period strategy lies in exploiting relative value across different delivery months. Since deliverable securities do not switch during the contract listing period, theoretically, the main factor affecting cross-period spread is the relative change in the price of deliverable securities.

In April–May this year, cross-period spread trading opportunities emerged because the deliverable securities underlying standard bond forwards experienced changes. When the yield of 25 CDB 10 was below that of 24 CDB 20 and 24 CDB 30, it reverted to be similar to both. Starting in early May, the pricing of the standard bond forward 09 contract began to be slightly lower than the 06 contract, causing the 06–09 cross-period spread to widen.

Figure 10 Widening of the 06–09 cross-period spread

Figure 11 Deliverable security trends of the ADBC10_2506 and ADBC10_2509 contracts

3. Curve strategy

A curve strategy mainly aims to flatten or steepen the corresponding yield curve. Compared with using cash bonds to implement a curve strategy, using standard bond forwards for a curve strategy does not require occupying cash bond quotas and does not require bond lending (the additional cost of shorting cash bonds), making it more convenient in terms of execution.

Starting from late August this year, the cash bond yield curve steepened. As a result, the term spread between the 5-year and 10-year standard bond forwards widened. To construct a position direction that “gets steeper,” we form 2*CDB5–CDB10, i.e., go long 2x CDB5 and short 1x CDB10.

Figure 12 Term spread widening

Figure 13 Cash bond yield 5*10 steepening

4. Cross-instrument strategy

There is a tax spread between agricultural development bonds (policy bank financial bonds) and T-bonds with the same maturity, which generally narrows in bull markets and widens in bear markets. Using standard bond forwards for a cross-instrument strategy does not require occupying cash bond quotas, nor does it require bond lending (the additional cost of shorting cash bonds). By constructing a cross-instrument strategy using free combinations of cash bonds, T-bond futures, and standard bond forwards, trading becomes more flexible.

In the second half of this year, the tax spread first widened and then narrowed. The price difference between the 10-year T-bond futures and the 10-year standard bond forwards first increased and then slightly declined. By using long T-bond futures and short standard bond forwards, we can better approximate the change trend of the policy bank bond tax spread.

Figure 14 Cross-instrument spread trend

In practice with interest rate derivatives, standard bond forwards are gradually being incorporated into trading strategies of market entities such as securities firms, becoming an important component of risk management. Its advantages are reflected in丰富 trading methods and enhancing the precision of risk management. Looking forward, as physical delivery contracts are continuously improved, contract tenors and underlying bond types are gradually expanded, and market mechanisms and clearing systems further mature, standard bond forwards will strengthen their core position within the interest rate derivatives framework and expand the depth and breadth of the interest rate derivatives market. This will also promote pricing efficiency and liquidity in China’s domestic interest rate market.

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