July 2016 Rates Recap

Fed Fund Futures Activity Surges

As markets remain uncertain, Fed Fund futures provide a highly liquid tool to manage risk around potential interest rate adjustments.

  • Record open interest: 1 million+ contracts
  • Record volume on June 24: 565,868 contracts
  • Year to date average daily volume (ADV): 132,000 contracts (+117% YoY)
  • June 2016 ADV: 184,000 contracts (+149% YoY)

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CME Group FedWatch Tool Now Features FOMC "Dot Plot"

The CME Group FedWatch tool, which had ~17,500 unique users, on average, in each of the past five weeks, uses Fed Fund futures prices to determine the probability of a rate change at upcoming FOMC meetings.

In June, CME Group released an updated version of the tool, featuring an easy to use, mobile friendly design and the most recent FOMC "Dot Plot."

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Barron's Highlights Value of CME Group FedWatch Tool

The CME Group FedWatch tool is frequently discussed in financial news publications such as the Wall Street Journal, the Financial Times, CNBC and the Los Angeles Times. For example, a June 11 Barron's article focused on the FedWatch tool as one of the best single indicators of what the Fed will do.


Over Six Million Contracts Traded in Ultra 10 in Less Than Six Months

With over 275 global market participants, 66,000 contracts traded daily, nearly 140,000 contracts in open interest, and 33 Large Open Interest Holders, the Ultra 10-Year Treasury Note futures contract is CME Group's fastest growing contract of all time.

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Brexit Impacts on Interest Rates Markets

As we enter Q3 2016, the U.S. Federal Reserve (Fed) is now expected to remain on “hold” through 2016 and well into 2017.

The immediate culprit is “Brexit,” the UK vote to leave the European Union (EU). Political leadership in the UK is in turmoil. In the European Union, the theme is to punish the UK, so that no other wayward nation would consider leaving. The political and economic uncertainty has been reflected in the markets with a global flight to quality, meaning a powerful rally in U.S. Treasuries and gold.

Both the Bank of England (BoE) and the European Central Bank (ECB) are expected to take actions to cushion the expected economic weakness. The BoE will probably welcome the lower value of the British pound as a way to stimulate exports. The ECB may consider how to expand its already massive quantitative easing program. And, some analysts expect the ECB to push rates further into negative territory, although time will tell since negative rates actually work to penalize the banking system and may hinder credit expansion.

In response, yields on the U.S. Treasury 10-Year Note have moved down to the 1.40% territory. This corresponds to the widespread belief that the Fed will ignore U.S. data, cite global uncertainties, and avoid any increase in its target federal funds rate range.

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