Interest Rate Futures Liquidity Update – Q1 2018

The New Treasury Market Paradigm, published by CME Group in June 2016, compared the evolution of market liquidity in Treasury futures products and corresponding adjacent marketplaces.  Among other findings, it confirmed the relative strengthening of Treasury futures liquidity in response to intensifying demand for off-balance-sheet means of holding Treasury note and bond exposures.

The trends it identified have gained significant momentum in the 21 months since the paper was published.

The quality of the central limit order book (CLOB), the fundamental signifier of futures market liquidity, affirms that the Treasury futures liquidity pool has deepened and grown more resilient in recent years.  For all Treasury futures products, for example, best bid/offered price spreads matched corresponding contract minimum price increments throughout more than 99 percent of each trading day.

Significantly, for each Treasury futures product, CLOB depth has improved at both the best bid/offered price level, and at the top three bid/offered price levels in aggregate.

Average Central Limit Order Book Size for Treasury Futures

 

Avg Book Size at Best Bid/Offer Level

Avg Book Size at Best 3 Bid/Offer Levels

2016

2017

Q1 2018

% Growth vs. 2017

2016

2017

Q1 2018

% Growth vs. 2017

2-Yr Note (ZT)

3,854

38,852

124,648

221%

13,760

74,152

178,621

141%

5-Yr Note (ZF)

596

866

1,066

23%

3,172

4,465

5,422

21%

10-Yr Note (ZN)

1,166

1,649

2,121

29%

6,360

8,324

10,507

26%

Ultra 10-Yr Note (TN)

96

138

183

33%

538

847

1,039

23%

Bond (ZB)

154

253

258

2%

843

1,309

1,410

8%

Ultra Bond (UB)

50

70

77

10%

309

414

418

1%

Outright front-month only, measured during regular trading hours (7:00 am to 4:00pm, CT)

Other liquidity metrics examined in The New Treasury Market Paradigm have continued to improve since mid-2016. Liquidity can be defined broadly as a market participant’s ability to convert assets into cash or to enter/exit a position, and is therefore proportional to indicators such as open interest, average daily trading volume, and breadth of market participation.  The following summarizes recent milestones in those 3 key liquidity measures.

Open Interest

(OI) reliably gauges outstanding positions. From 2015 to 2016, average daily open interest (ADOI) in all CME Group interest rate products grew 15%. In 2017, ADOI grew another 17%. Through the first quarter of 2018, ADOI has increased 14%, setting new single-day records in every product group along the way (summarized in the following table and illustrated in the following four charts)

Product Group

2018 Q1 ADOI

2017 ADOI

% Growth vs 2017

All-time record

Date of record

Interest Rate F&O

79,765,391

70,232,368

14%

90,992,998

03/15/18

Eurodollar Futures

15,693,460

13,096,545

20%

17,876,100

03/15/18

Eurodollar Options

44,295,882

40,449,845

10%

52,364,348

03/15/18

Treasury Futures

11,158,674

9,757,167

14%

12,677,304

02/22/18

Treasury Options

6,647,488

5,335,574

25%

9,835,910

02/22/18

Fed Fund Futures

1,904,423

1,524,868

25%

2,474,629

03/29/18

Aggregate Treasury futures OI set numerous single-day records, fueled by growth and single-day records in “Classic” 10-Year T-Note futures, 5-Year T-Note futures, 2-Year T-Note futures, “Ultra” 10-Year T-Note futures and Ultra T-Bond futures. Single-day open interest records were also set in 10-Year note options, 5-Year note options, Eurodollar Mid-Curve options, and Weekly Treasury options.

Daily Trading Volume

Following a record 2016, various interest rate products and product sectors hit new highs in annual average daily trading volume (ADV) in 2017. In Q1 2018, ADV surged 46% compared to 2017’s record levels, while new single-day records were reached in Treasury futures and Treasury options.

Product Group

Q1 2018 ADV

2017 ADV

% Growth vs 2017

Single-Day Volume Record (contracts)

Date of record

Interest Rate F&O

11,948,016

8,189,337

46%

26,646,985

11/09/16

Eurodollar Futures

4,060,240

2,549,192

59%

11,562,175

11/09/16

Eurodollar Options

1,988,270

1,368,247

45%

4,705,224

12/15/16

Treasury Futures

4,540,645

3,327,895

36%

14,453,428

02/26/18

Treasury Options

1,070,743

747,825

43%

2,110,935

02/06/18

Fed Fund Futures

283,092

191,148

48%

907,185

06/14/17

Q1 2018 Treasury futures ADV of 4.5 million contracts, signifies $515 billion notional face value per day. That’s massive, not just in absolute terms, but also in comparison to the adjacent cash government securities market.  For the first time ever, the notional value of futures trading volume surpassed 100% of trading volume in cash Treasury notes and bonds (as measured on a 52-week moving average), up from 94% in 2017, 80% in 2016 and 75% in 2015.

Breadth of Participation

Interest Rate futures markets have achieved increasingly broad participation by an increasingly diverse user base, as evidenced by the number of large open interest holders (LOIH) tallied in the CFTC weekly Commitment of Traders report. Aggregate LOIH, a fair proxy for overall market participation among firms holding significant positions, reached a record high of 2,086 OI holders on February 20, 2018. In Q1 2018, new highs were also reached in Treasury futures (1,540 on 2/20), Fed Fund futures (175 on 2/27), 10-Year Note futures (444 on 1/23), 5-Year Note futures (355 on 2/6), 2-Year Note futures (348 on 3/27), Ultra Bond futures (129 on 2/20) and Ultra 10-Year note futures (95 on 2/27).

 

Reportable Position Size in contracts ($ notional)

2016 Avg Weekly LOIH

2017 Avg Weekly LOIH

Q1 2018 Avg Weekly LOIH

2-Year Note (ZT)

1000 ($200M)

245

275

330

5-Year Note (ZF)

2000 ($200M)

288

306

334

10-Year Note (ZN)

2000 ($200M)

357

392

427

Ultra 10-Year Note (TN)

1500 ($150M)

26

65

92

Bond (ZB)

1500 ($150M)

149

160

177

Ultra Bond (UB)

2000 ($200M)

98

110

120

 

 

 

 

 

Eurodollar (ED)

850 ($850M)

276

306

305

Fed Funds

600 ($3B)

129

151

162

 

 

 

 

 

10-Year MAC Swap (N1U)

 

44

48

48

5-Year MAC Swap (F1U)

 

36

33

35

 

 

 

 

 

Aggregate

 

1,649

1,846

2,030

Large Open Interest Holders sourced from CFTC’s Traders in Financial Futures Report, http://www.cftc.gov/Marketreports/CommitmentsofTraders/index.htm

Read our original whitepaper, The New Treasury Market Paradigm, at cmegroup.com/treasuryparadigm