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 gained momentum in 2016 H2 and to an even greater extent in 2017 Q1.
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 improved either at best bid/offered price levels, or at the top three bid/offered price levels in aggregate, or both – a noteworthy achievement in any circumstance, but especially in 2016’s atmosphere of rising yield volatility.
CLOB depth has continued to grow across the board in the first quarter of 2017, led by significant increases in ZT and ZB.
|Avg Book Size at Best Bid/Offer Level||Avg Book Size at Best 3 Bid/Offer Levels|
|2015||2016||Q1-2017||Q117 vs 2016 FY||2015||2016||Q1-2017||Q117 vs 2016 FY|
|2-Yr Note (ZT)||3,608||3,854||7,266||89%||15,695||13,760||23,510||71%|
|5-Yr Note (ZF)||512||596||644||8%||2,596||3,172||3,575||13%|
|10-Yr Note (ZN)||943||1,166||1,195||2%||4,860||6,360||6,359||0%|
|Ultra 10-Yr Note (TN)||n/a||96||90||-6%||n/a||538||637||18%|
|Ultra Bond (UB)||51||50||55||10%||276||309||351||14%|
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.
(OI) reliably gauges outstanding positions. From 2015 to 2016, average daily open interest (ADOI) in all CMEG interest rate products grew 15%. The first quarter of 2017 saw another 13% growth in ADOI as well as numerous single-day records along the way (summarized in the following table and illustrated in the following four charts)
|Product Group||Q1 2017 ADOI||2016 ADOI||% Growth vs 2016||All-time record||Date of record|
|All Interest Rate F&O||66,657,444||58,967,923||13%||74,052,279||3/9/2017|
|Fed Fund Futures||1,322,131||922,633||43%||1,680,555||3/30/2017|
Aggregate Treasury futures OI set 14 new single-day records in Q1 2017, fueled by growth and single day records in 5-Year T-Note futures, “Classic” 10-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 and 2-Year Eurodollar Mid-Curve options.
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 --
|Product Group||2016 ADV (contracts)||% Growth vs 2015||2016 Single-Day Volume Record (contracts)||Date of record|
|Interest Rate F&O||7,516,642||12%||26,646,985||11/09/2016|
|Treasury Futures||2,976,801||7%||No applicable record in 2016|
|Fed Fund Futures||132,141||65%||612,960||11/9/2016|
The full-year record in Treasury futures ADV, 3.026 million contracts, signifies $331 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 shot to 80.3% of trading volume in cash Treasury notes and bonds, smashing the previous record of 75% in 2015.
The trend has continued in the early months of 2017 with daily notional volume in Treasury futures increasing to $337 billion per day on a 52-week moving average – representing over 82% of cash market volume.
The first quarter of 2017 saw significant growth across the entire interest rate complex with total daily volume reaching a quarterly record of over 9.2M contracts, +11% vs the previous quarterly record and +22% vs full year 2016. New single day records were also hit in Fed Fund futures (713K contracts) and Treasury futures (13.3M contracts).
|Q1 2017 ADV
|Q1 2017 ADV
(Notional in $B)
|% Chg vs.
|Fed Fund Futures||251,769||$1,258||91%|
|Total Interest Rate Futures & Options||9,169,082||$6,421||22%|
Interest Rate futures markets have achieved increasingly broad participation by an increasingly diverse user base, as evidenced by the number of large open interest holders (LOIH) tallied in the CFTC weekly Commitment of Traders report. Aggregate LOIH, a fair proxy for overall market participation among firms holding significant positions, reached a record high of 1,834 OI holders on March 21, 2017. New highs were also reached in Treasury futures (1,294) and 5-Year Note futures (313), while Ultra 10-Year note futures reached a record high of 66 in the March 14 report.
|Reportable Position Size
in contracts ($ notional)
|2016 Avg Weekly LOIH||LOIH on 21 Mar 2017|
|10-Year Note (ZN)||2000 ($200M)||357||395|
|5-Year Note (ZF)||2000 ($200M)||288||313|
|2-Year Note (ZT)||1000 ($200M)||245||280|
|Bond (ZB)||1500 ($150M)||149||148|
|Ultra Bond (UB)||2000 ($200M)||98||97|
|Ultra 10-Year Note (TN)||1500 ($150M)||26||61|
|Eurodollar (ED)||3000 ($3B)||276||298|
|Fed Funds||600 ($3B)||129||155|
|10-Year MAC Swap (N1U)||44||49|
|5-Year MAC Swap (F1U)||36||38|
Whitepaper: The New Treasury Market Paradigm
Tool: Total Cost Analysis Tool (quantitative model to help you analyze the all-in costs of trading Interest Rate Swaps vs. Treasuries.
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author(s) and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
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