The 20-year bond has had great success since its introduction two years ago. With more than a half trillion dollars of issuance completed according to the CME Group TreasuryWatch tool, demand is stronger than ever.
The Treasury Department re-introduced the 20-year bond in May 2020, the first time since 1986.1 This tenor was re-introduced as an additional tool to expand the borrowing capacity of the Treasury and it simultaneously gave market participants the ability to trade the critical 20-year tenor point on the yield curve.
CME Group launched 20-Year Bond futures for trading on the CME Globex platform on March 7, 2022, and, most recently, made changes to the contract grade, giving market participants even more reasons to trade this new tenor.
A welcome addition to the Treasury futures complex
The 20-Year futures contract will physically deliver a bond with remaining term to maturity of at least 19 years and 2 months and less than 19 years and 11 months. The new 20-Year futures will have a basket of six securities, including three recently auctioned 20-year bonds and three aging 30-year bonds.
|Product||Clearing Code||Year Launched|
|2-Yr Note Futures||26||1990|
|3-Yr Note Futures||3YR||Relaunched 2020|
|5-Yr Note Futures||25||1988|
|10-Yr Note Futures||21||1982|
|Ultra 10-Yr Note Futures||TN||2016|
|Treasury Bond Futures||17||1977|
|20-Yr Bond Futures||TWE||2022|
|Ultra Bond Futures||UBE||2010|
Source: CME Group
The 20-Year futures contract allows market participants to trade at the 20-year tenor point, providing a more accurate representation of 20-year risk. Furthermore, it affords greater trading opportunities with CME Group’s existing Treasury futures, including the 10-Year, Treasury Bond, and Ultra Bond contracts. All in all, 20-Year futures are a welcome addition to this suite of successful products.
Unique deliverable baskets
The addition of a 20-Year futures contract will have a unique impact on the deliverable basket. Treasury futures contracts tend to be fulfilled by delivery of the corresponding cheapest-to-deliver (CTD) note or bond issue, therefore it is instructive to consider the supply of the futures contract’s CTD issue, rather than the face value of the entire deliverable supply.
With market yields well under 6 percent (the yield level that the Exchange uses to standardize conversion factors for determination of Treasury futures delivery invoice prices), the CTD issue for an expiring 20-Year contract is likely to be the shortest duration bond in the basket. The CTD issue also typically is the bond with the lowest cash flow cost, making it the most attractive security for the holder of a short position in the futures contract.
When a new bond is issued, it is deemed the on-the-run (OTR) security and it replaces the current OTR, which then becomes the “old” security. The 20-year bond is issued on a quarterly basis, meaning the triple-old 20-year bond was the OTR bond when it was first issued nine months prior.
Effective May 9, 2022 and beginning with the September 2022 contract of the 20-Year futures, the OTR security will no longer be included and aging 30-year U.S. Treasury Bonds will be included in the deliverable basket. These changes to the 20-Year futures contract will ensure an effective delivery basket for a variety of interest rate environments and bond issuance scenarios.
A hypothetical delivery basket for the September 2022 contract is provided below. In this instance, the CTD is the oldest aging 30-year bond in the basket.
|n/a||5/31/2022||5/15/2042||TBD 20-year bond**||n/a||n/a||n/a|
*as of April 28, 2022;
**will be auctioned May 18, 2022
Thus far, eight 20-year bonds have been issued by the Treasury, with an average original issuance size of nearly $25 billion; however, taking reissuances into account, the adjusted issuance size averages to $67 billion.
The CTD issue for the September 2022 20-year has an issuance size of $42 billion. The 20-year will typically have a larger issuance because, along with the 10- and 30-year, the 20-year bond is auctioned three times, providing an opportunity for the issuance size to expand.
CME Group’s Treasury Analytics tool provides an interactive way to find the CTD for specific contract months, as well as to see a breakdown of the deliverable baskets for each issue and important values associated with inter-commodity spread ratios, making the tool a one-stop-shop for market participants looking to trade both futures and cash Treasuries.
Opportunities for customers
Now that traders can manage risk at the 20-year tenor point on the yield curve, they might also enjoy improved Treasury yield curve trading, greater cash-futures spread trading opportunities, and margin offsets.
Improved Treasury yield curve trading
The introduction of 20-Year futures provides greater spread-trading opportunities for customers. Along with the initial launch of the futures contract, there are a full suite of spreads and combinations against established members of the Treasury futures suite available on the CME Globex electronic trading platform, including the inter-commodity spreads in the table below.
|Futures Contract Legs||Price Ratio****||Leg Quantity
|TTW||2-Year T-Note vs. 20-Year T-Bond||2.0000||1:1|
|TWW||2-Year T-Note vs. 20-Year T-Bond||14.0000||7:1|
|TRW||3-Year T-Note vs. 20-Year T-Bond||2.0000||1:1|
|THW||3-Year T-Note vs. 20-Year T-Bond||8.0000||4:1|
|FTW||5-Year T-Note vs. 20-Year T-Bond||1.0000||1:1|
|FYW||5-Year T-Note vs. 20-Year T-Bond||5.0000||5:1|
|TYW||10-Year T-Note vs. 20-Year T-Bond||1.0000||1:1|
|TOW||10-Year T-Note vs. 20-Year T-Bond||3.0000||3:1|
|NYW||Ultra 10-Year T-Note vs. 20-Year T-Bond||1.0000||1:1|
|NTW||Ultra 10-Year T-Note vs. 20-Year T-Bond||2.0000||2:1|
|ZBW||T-Bond vs. 20-Year T-Bond||1.0000||1:1|
|ZTW||T-Bond vs. 20-Year T-Bond||1.3331||4:3|
|TWU||20-Year T-Bond vs. Ultra T-Bond||1.0000||1:1|
|TWB||20-Year T-Bond vs. Ultra T-Bond||1.5000||3:2|
*Leg quantity and price ratios are subject to change
Greater cash-futures spreading
20-Year futures are proximate to not just the Treasury Bond, but to the Ultra Bond as well, making the new contract an appropriate hedge and proxy for long-end Treasury yield exposure. Furthermore, customers can take advantage of cash spreading opportunities at the 20-year and 30-year points using the BrokerTec platform and BrokerTec RV Curve. These enhanced spread trading opportunities will allow for greater price discovery between both the futures and cash markets and expands market participants’ ability to manage basis risk.
Lastly, there will be immediate cash efficiencies offered by margin offsets to position accounts that contain interest rate products. CME Group has evaluated the risk profile interactions between the 20-Year contract and Treasury futures, short-term interest rate, and deliverable swap futures complexes, and will apply the appropriate levels of margin offsets where applicable. 20-Year futures will be made available for portfolio margining in order to capture the potential capital efficiencies afforded by offsetting the risk between the 20-Year futures and cleared OTC interest rate swaps.
How the 20-Year stacks up
Creation and analysis of a price history of 20-Year futures showed its synthetic price tracks nicely with both 10-Year Note futures and Treasury Bond futures, making it an appropriate hedge and additional tool to trade the yield curve and helping to manage risk. This synthetic price history can be downloaded here.
|Contract Title / Rulebook Chapter||20-Year U.S. Treasury Bond Futures / CBOT 25|
|CME Globex and CME ClearPort Code||TWE|
|Trading and Clearing Hours||CME Globex: Sunday - Friday 5:00 p.m. - 4:00 p.m. CT (6:00 p.m. - 5:00 p.m. ET) with a 60-minute break each day beginning at 4:00 p.m. CT (5:00 p.m. ET)
CME Globex PreOpen: Sunday 4:00 p.m. - 5:00 p.m. CT (5:00 - 6:00 p.m. ET) Monday-Thursday 4:45 p.m. - 5:00 p.m. CT (5:45 - 6:00 p.m. ET)
CME ClearPort: Sunday 5:00 p.m. CT (6:00 p.m. ET) - Friday 5:45 p.m. CT (6:45 p.m. ET) with a 15-minute break each day beginning at 5:45 p.m. CT (6:45 p.m. ET)
|Product Unit of Measure||Index Points|
|Price Quotation||Points and fractions of points with par on the basis of 100 points|
|Minimum Price Fluctuation||1/32 of 1 point (0.03125) = $31.25|
|Minimum Daily Settlement Increment and Final Settlement Increment||1/32 of 1 point (0.03125)|
|Listing Schedule||Quarterly contracts (Mar, Jun, Sep, Dec) listed for 3 consecutive quarters|
|Termination of Trading||12:01 p.m. CT on the seventh business day preceding the last business day of the delivery month|
|Grade and Quality||Original issue 20-Year and 30-Year U.S. Treasury bonds with at least 19 years 2 months and less than 19 years 11 months of remaining term to maturity from first day of futures delivery month. The invoice price equals the futures settlement price times a conversion factor, plus accrued interest. The conversion factor is the price of the delivered bond ($1 par value) to yield 6 percent.|
|Block Trade Minimum Threshold||RTH-1000; ETH-500; ATH-250|
|Reporting Window||RTH - 5 minutes ETH/ATH - 15 minutes|
|CME Globex Matching Algorithm||F-FIFO 100%|
Hello, Mr. Bond
Beginning March 7, take aim at 20-year Treasury exposure with the newest addition to our UST lineup... Bond, 20-Year Bond.
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 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.