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 15 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

21,425

456%

15,695

13,760

52,826

284%

5-Yr Note (ZF)

512

596

797

34%

2,596

3,172

4,248

34%

10-Yr Note (ZN)

943

1,166

1,549

33%

4,860

6,360

8,034

26%

Ultra 10-Yr Note (TN)

n/a

96

127

33%

n/a

538

819

52%

Bond (ZB)

149

154

248

61%

747

843

1,302

54%

Ultra Bond (UB)

51

50

68

35%

276

309

413

34%

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

*2017 YTD through September 29

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 CMEG interest rate products grew 15%. Through the first three quarters of 2017, ADOI has grown another 17%, surpassing numerous single-day records 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

69,228,904

58,967,923

17%

78,621,162

06/05/2017

Eurodollar Futures

13,053,578

10,940,039

19%

14,329,692

09/13/2017

Eurodollar Options

39,715,155

35,048,679

13%

47,614,186

06/15/2017

Treasury Futures

9,588,643

7,980,169

20%

10,684,600

08/28/2017

Treasury Options

5,263,145

3,985,929

32%

7,242,080

08/24/2017

Fed Fund Futures

1,537,325

922,633

67%

1,801,747

09/01/2017

*2017 ADOI YTD through September 29

Aggregate Treasury futures OI set numerous single-day records in 2017, fueled by growth and single day records in “Classic” 10-Year T-Note futures, 5-Year T-Note futures, “Ultra” 10-Year Note futures and Ultra T-Bond futures. Single day open interest records were also set in 5-Year note options, 2-Year Eurodollar Mid-Curve options, and Friday 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. Through the first three quarters of 2017, ADV has grown 10% compared to 2016’s record levels, while new single-day records have been 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

8,262,882

7,516,642

10%

26,646,985

11/09/2016

Eurodollar Futures

2,612,775

2,598,997

1%

11,562,175

11/09/2016

Eurodollar Options

1,379,047

1,225,330

13%

4,705,224

12/15/2016

Treasury Futures

3,294,940

2,976,801

11%

13,264,359

02/23/2017

Treasury Options

761,684

577,153

32%

2,026,379

11/10/2016

Fed Fund Futures

209,159

132,141

58%

907,185

06/14/2017

*2017 ADV YTD through September 29

2017 YTD Treasury futures ADV, 3.294 million contracts, signifies $355 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 88.5% 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 134% 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 1,952 OI holders on September 5, 2017. In 2017, new highs have also been reached in Treasury futures (1,350), 10-Year Note futures (419), 5-Year Note futures (315), Ultra Bond futures (121) and Ultra 10-Year note futures (70).

 

Reportable Position Size in contracts ($ notional)

2016 Avg Weekly LOIH

LOIH on 5 Sep 2017

10-Year Note (ZN)

2000 ($200M)

357

411

5-Year Note (ZF)

2000 ($200M)

288

315

2-Year Note (ZT)

1000 ($200M)

245

292

Bond (ZB)

1500 ($150M)

149

156

Ultra Bond (UB)

2000 ($200M)

98

121

Ultra 10-Year Note (TN)

1500 ($150M)

26

68

 

 

 

 

Eurodollar (ED)

850 ($850M)

276

345

Fed Funds

600 ($3B)

129

166

 

 

 

 

10-Year MAC Swap (N1U)

 

44

49

5-Year MAC Swap (F1U)

 

36

29

 

 

 

 

Aggregate

 

1,649

1952

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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