Over the past few years, several new interest rate products have been introduced, a number of which have been wholeheartedly embraced by the trading community, and others that are largely still waiting to be discovered. The products range from contracts that focus on the near-term, such as weekly Treasury options, which are driven by events or headlines, to those that target the longer term, such as the U.S. Ultra Treasury bond futures (Ultra T-Bonds).

Now with Standard and Poor’s U.S. credit rating downgraded to AA+, market participants will "look for new ways to skin the cat," says Mike Donohue, an independent trader and industry veteran. "Anything based in the U.S. will now move." Donohue, who managed proprietary trading firms in Singapore and Australia before recently returning to Chicago, has been trading sovereign debt for more than 15 years. He was a staunch proponent of CME Group introducing a Sovereign Yield Spread futures (Sovys) contract, anticipating that there was a potential for things to unwind in the sovereign debt space. He wanted a product that could take advantage of the interest rate differential and would allow for simpler, more cost-effective and more efficient trading and monitoring of sovereign bond spread positions.

Indeed, Derek Sammann, CME Group managing director, FX and interest rate products, calls the exchange’s Sovys contract, introduced in May 2011, a "true game changer." The contract wraps a sovereign bond yield spread into a single futures contract, eliminating the need for market participants to execute and manage individual legs in the cash bond markets or across multiple exchanges. It incorporates bonds from the most liquid sovereign debt markets, including the United States, Germany, France, Italy, the Netherlands and the United Kingdom. Sammann says that when volatility surfaced a year ago with uncertainty in Europe, it became clear that clients wanted to trade sovereign debt.

Adding to the interest in new contract offerings is the Dodd-Frank Wall Street Reform and Consumer Protection Act. Market watchers anticipate that under the act, the costs of trading over-the-counter (OTC) market products will go up, leaving market participants looking for products that are more transparent and capital efficient.

Ultra T-Bond futures, which launched in 2010, provide market participants with a direct way to manage long-term interest rate risk and add duration to their portfolio. The key feature distinguishing the Ultra T-Bond from the existing 30-year U.S. Treasury bond futures is the relatively narrow range of deliverable securities.

"The Ultra will be a useful substitute for anyone who has that kind of a need," says Amrut Nashikkar, U.S. fixed income strategist at Barclays Capital.

According to John Brosnan, head of fixed income trading at XR Trading, the Ultra bond has brought tremendous value to a relatively under-served duration point on the yield curve. Prior to its creation, most long-dated risk was mitigated using swap, cash Treasuries and other OTC products.

"The Ultra bond is truly unique in the sense that it gained immediate market acceptance and it continues to grow in popularity and utilization," he says. "I firmly believe that it will serve as the litmus test for successful product launches in the futures industry." Brosnan adds that as yields accelerate toward unprecedented lows, opportunities to mitigate risk at the front end of the yield curve appear to be diminishing. The long end, as of late, has served as a better "risk-off" proxy for safe-haven investors. "This is atypical behavior, but probably something that will increase participation in the Ultra bond for months, if not years, to come," he says.

Other new interest rate products are slowly gathering open interest at the exchange. On-The-Run (OTR) Treasury futures are a cash-settled contract that settles to the yield of the on-the-run-Treasury. Because it is a physically delivered contract, the contract tends to track the cheapest-to-deliver. The OTR futures are used to create basis spreads with minimal margin requirements. Weekly Treasury options complement the standard options and the flexible options on U.S. Treasury futures and give market participants the opportunity to trade specific news events—such as the nonfarm payrolls report.

But Sammann notes that technology also can be innovative. In August 2011, CME Group started the ball rolling on a number of enhancements to its interest rate futures on CME Globex, its electronic trading platform. The migration to a new matching engine increased the speed and efficiency of trading. Enhancements included faster round-trip turn times, along with the ability to modify orders multiple times without waiting for an acknowledgment from CME Globex on enhancements to the existing order modification process.