Interest Rate Futures Liquidity Metrics Reach New Highs

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 18 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

2015

2016

2017

% Growth vs 2016

2015

2016

2017

% Growth vs 2016

2-Yr Note (ZT) 3,608 3,854 38,852 908% 15,695 13,760 74,152 439%
5-Yr Note (ZF) 512 596 866 45% 2,596 3,172 4,465 41%
10-Yr Note (ZN) 943 1,166 1,649 41% 4,860 6,360 8,324 31%
Ultra 10-Yr Note (TN) n/a 96 138 44% n/a 538 847 57%
Bond (ZB) 149 154 253 64% 747 843 1,309 55%
Ultra Bond (UB) 51 50 70 39% 276 309 414 34%

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%, 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

2017 ADOI

2016 ADOI

% Growth vs 2016

All-time Record

Date of record

Interest Rate F&O

70,232,368

58,967,923

19%

79,230,678

11/22/2017

Eurodollar Futures

13,096,545

10,940,039

20%

14,430,858

12/13/2017

Eurodollar Options

40,449,845

35,048,679

15%

47,963,896

6/15/2017

Treasury Futures

9,757,167

7,980,169

22%

11,370,975

11/22/2017

Treasury Options

5,335,574

3,985,929

34%

7,907,673

10/26/2017

Fed Fund Futures

1,524,868

922,633

65%

1,801,747

9/1/2017

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 5-Year note options, 1-Year Eurodollar Mid-Curve options, 2-Year Eurodollar Mid-Curve options, and Weekly Treasury options.

Daily Trading Volume

Various interest rate products and product sectors hit new highs in annual average daily trading volume (ADV) in 2016, in addition to posting new single-day records. In 2017, ADV grew 9% compared to 2016’s record levels, while new single-day records were reached in Treasury futures and Fed Fund futures.

Product Group

2017 ADV

2016 ADV

% Growth vs 2016

Single-Day Volume
Record (contracts)

Date of record

Interest Rate F&O

8,189,337

7,516,642

9%

26,646,985

11/9/2016

Eurodollar Futures

2,549,192

2,598,997

-2%

11,562,175

11/9/2016

Eurodollar Options

1,368,247

1,225,330

12%

4,705,224

12/15/2016

Treasury Futures

3,327,895

2,976,801

12%

13,273,069

11/27/2017

Treasury Options

747,825

577,153

30%

2,026,379

11/10/2016

Fed Fund Futures

191,148

132,141

45%

907,185

6/14/2017

2017 Treasury futures ADV, 3.327 million contracts, signifies $371 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.  Notional value of futures trading volume has surged to 94.2% of trading volume in cash Treasury notes and bonds, up from 80% in 2016 and 75% in 2015. Notional volume in TY and TN is now 143% of the proximate sector of the cash market (6 to 11 years).

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 1,954 OI holders on November 21, 2017. In 2017, new highs were also reached in Treasury futures (1,406), Eurodollar futures (345), Fed Fund futures (172), 10-Year Note futures (425), 5-Year Note futures (325), 2-Year Note futures (309), Ultra Bond futures (122) and Ultra 10-Year note futures (86).

 

Reportable Position Size in contracts ($ notional)

2016 Avg Weekly LOIH

2017 Avg Weekly LOIH

Record LOIH on 21 Nov 2017

10-Year Note (ZN)

2000 ($200M)

357

392

424

5-Year Note (ZF)

2000 ($200M)

288

306

325

2-Year Note (ZT)

1000 ($200M)

245

275

302

Bond (ZB)

1500 ($150M)

149

160

161

Ultra Bond (UB)

2000 ($200M)

98

110

117

Ultra 10-Year Note (TN)

1500 ($150M)

26

65

77

 

 

 

 

 

Eurodollar (ED)

850 ($850M)

276

306

310

Fed Funds (ZQ)

600 ($3B)

129

151

156

 

 

 

 

 

10-Year MAC Swap (N1U)

 

44

48

49

5-Year MAC Swap (F1U)

 

36

33

33

 

 

 

 

 

Aggregate

 

1,649

1,846

1,954

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

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