At launch, CME Group will offer predefined, non-implied spreads between each coupon and our 10-Year Treasury Note futures. The 30-Year UMBS TBA coupon will be the front leg of the spread. The 10-Year Note will be the back leg of the spread. Due to the similarity in contract sizes, spreading TBA futures and Treasury futures will be relatively easy and straightforward. Moreover, spread positions between TBAs and Treasuries, regardless of how they are executed, will be eligible for margin spread credits vs. 10-Year Note futures.
Here is a table of the current DV01s* and spread ratios and combinations that will be available at launch:
| Spread Name | Price Ratio | Leg 1 | Leg 1-# of Contracts | Leg 1 DV01 | Leg 2 | Leg 2-# of Contracts | Leg 2 DV01 |
|---|---|---|---|---|---|---|---|
| UPN 01-01 Z2-Z2 | 1.0000 | 20UZ2 | 1 | 66.60 | ZNZ2 | 1 | 72.25 |
| UPN 01-01 Z2-H3 | 1.0000 | 20UZ2 | 1 | ZNH3 | 1 | 77.30 | |
| UPN 01-01 F3-H3 | 1.0000 | 20UF3 | 1 | ZNH3 | 1 | ||
| UPN 01-01 G3-H3 | 1.0000 | 20UG3 | 1 | ZNH3 | 1 | ||
| UQN 01-01 Z2-Z2 | 1.0000 | 25UZ2 | 1 | 68.10 | ZNZ2 | 1 | 72.25 |
| UQN 01-01 Z2-H3 | 1.0000 | 25UZ2 | 1 | ZNH3 | 1 | 77.30 | |
| UQN 01-01 F3-H3 | 1.0000 | 25UF3 | 1 | ZNH3 | 1 | ||
| UQN 01-01 G3-H3 | 1.0000 | 25UG3 | 1 | ZNH3 | 1 | ||
| URN 01-01 Z2-Z2 | 1.0000 | 30UZ2 | 1 | 69.50 | ZNZ2 | 1 | 72.25 |
| URN 01-01 Z2-H3 | 1.0000 | 30UZ2 | 1 | ZNH3 | 1 | 77.30 | |
| URN 01-01 F3-H3 | 1.0000 | 30UF3 | 1 | ZNH3 | 1 | ||
| URN 01-01 G3-H3 | 1.0000 | 30UG3 | 1 | ZNH3 | 1 | ||
| UTN 01-01 Z2-Z2 | 1.0000 | 35UZ2 | 1 | 68.70 | ZNZ2 | 1 | 72.25 |
| UTN 01-01 Z2-H3 | 1.0000 | 35UZ2 | 1 | ZNH3 | 1 | 77.30 | |
| UTN 01-01 F3-H3 | 1.0000 | 35UF3 | 1 | ZNH3 | 1 | ||
| UTN 01-01 G3-H3 | 1.0000 | 35UG3 | 1 | ZNH3 | 1 | ||
| UUN 01-01 Z2-Z2 | 1.0000 | 40UZ2 | 1 | 67.50 | ZNZ2 | 1 | 72.25 |
| UUN 01-01 Z2-H3 | 1.0000 | 40UZ2 | 1 | ZNH3 | 1 | 77.30 | |
| UUN 01-01 F3-H3 | 1.0000 | 40UF3 | 1 | ZNH3 | 1 | ||
| UUN 01-01 G3-H3 | 1.0000 | 40UG3 | 1 | ZNH3 | 1 | ||
| NTU 05-04 Z2-Z2 | 1.2500 | 45UZ2 | 5 | 56.20 | ZNZ2 | 4 | 72.25 |
| NTU 05-04 Z2-H3 | 1.2500 | 45UZ2 | 5 | ZNH3 | 4 | 77.30 | |
| NTU 05-04 F3-H3 | 1.2500 | 45UF3 | 5 | ZNH3 | 4 | ||
| NTU 05-04 G3-H3 | 1.2500 | 45UF3 | 5 | ZNH3 | 4 | ||
| THN 05-03 Z2-Z2 | 1.6667 | 50UZ2 | 5 | 42.80 | ZNZ2 | 3 | 72.25 |
| THN 05-03 Z2-H3 | 1.6667 | 50UZ2 | 5 | ZNH3 | 3 | 77.30 | |
| THN 05-03 F3-H3 | 1.6667 | 50UF3 | 5 | ZNH3 | 3 | ||
| THN 05-03 G3-H3 | 1.6667 | 50UG3 | 5 | ZNH3 | 3 |
*DV01s are as of 8 Sep ’22 using Bloomberg Analytics
If we assume that the basis between TBA forwards and futures is zero, here is what the hypothetical futures spread pricing could have been based on FINRA TBA and Treasury futures (ZNZ2) on September 6, 2022:
| Spread Symbol | Leg 1 | Price | Contracts Leg1 | Leg2 | Price | Contracts Leg2 | Spread Price Decimal | Spread Price-32nds |
|---|---|---|---|---|---|---|---|---|
| UTN 01-01 X2-Z2 | 35UX2 | 94.3 | 1 | ZNZ2 | 115.5938 | 1 | -21.294 | -21-095 |
| UUN 01-01 X2-Z2 | 40UX2 | 96.7 | 1 | ZNZ2 | 115.5938 | 1 | -18.894 | -18-285 |
| NTU 05-04 X2-Z2 | 45UX2 | 98.5 | 5 | ZNZ2 | 115.5938 | 4 | 30.125 | 30-04 |
| THN 05-03 X2-Z2 | 50UX2 | 100.2 | 5 | ZNZ2 | 115.5938 | 3 | 154.219 | 154-07 |
Correlation of 30-Year UMBS TBAs and select Treasury futures
Correlation of monthly returns for TBAs on 30-Year UMBS and Treasury futures provides a sense of the hedging and spreading relationships between them. At launch on November 7, 2022, the 30-Year UMBS TBA futures have a coupon stack of seven coupons ranging from 2.0% to 5.0%. The three nearby contracts were utilized in our TBA analysis with rolling contract months for the TBA coupons. For the Treasury futures, we applied the price of the rolling front month. 5-Year (FV), 10-Year (TY), Ultra 10-Year (TN) and Classic Bond (US) futures were used in our analysis. The 2% coupon has a two-year history (Jul-2020 through Sep-2022) due to it recently becoming active with the decline in mortgage rates (2020). All of the other coupons (2.5%, 3%, 3.5%, 4%, 4.5%, 5%) have a history of more than 10 years (Jan-2012 through Sep-2022).
Please refer to Table 1. (TY), Table 2. (FV), Table 3. (TN), and Table 4. (US) below for the correlation of monthly returns for these Treasury futures and the active contract months and coupons of TBAs on 30-Year UMBS.
Table 1. Correlation of monthly returns for 10-Yr Note futures and coupon stack of TBA futures
| TY | Expiry | ||
|---|---|---|---|
| Coupon | Spot | Spot+1 | Spot +2 |
| 2* | 0.92249 | 0.92327 | 0.92328 |
| 2.5 | 0.80121 | 0.79370 | 0.78599 |
| 3 | 0.84316 | 0.83587 | 0.82645 |
| 3.5 | 0.87320 | 0.86829 | 0.86108 |
| 4 | 0.84747 | 0.85103 | 0.85165 |
| 4.5 | 0.77301 | 0.78171 | 0.78436 |
| 5 | 0.69368 | 0.70581 | 0.71362 |
Source: Bloomberg
*2% coupon has a two-year history. Other coupons have a monthly history from Jan-2012 through Sep-2022.
The TY correlations ranged from 0.694 to 0.923. The 2.0% coupon, with the shortest history, produced the highest correlations for all three months. The 5.0% coupon produced the lowest correlations.
Table 2. Correlation of monthly returns for 5-Yr Note futures and coupon stack of TBA futures
| FV | Expiry | ||
|---|---|---|---|
| Coupon | Spot | Spot+1 | Spot +2 |
| 2* | 0.88053 | 0.88243 | 0.88178 |
| 2.5 | 0.84520 | 0.84222 | 0.83945 |
| 3 | 0.81854 | 0.81968 | 0.81731 |
| 3.5 | 0.79342 | 0.79804 | 0.79971 |
| 4 | 0.77528 | 0.77875 | 0.78202 |
| 4.5 | 0.73112 | 0.74568 | 0.74493 |
| 5 | 0.60750 | 0.63618 | 0.64013 |
Source: Bloomberg
*2% coupon has a two-year history. Other coupons have a monthly history from Jan-2012 through Sep-2022.
The FV correlations ranged from 0.607 to 0.882. The 2.0% coupon, with the shortest history, produced the highest correlations for all three months. The 5.0% coupon produced the lowest correlations.
Table 3. Correlation of monthly returns for Ultra 10-Yr Note futures and coupon stack of TBA futures
| TN** | Expiry | ||
|---|---|---|---|
| Coupon | Spot | Spot+1 | Spot +2 |
| 2* | 0.88964 | 0.88947 | 0.88939 |
| 2.5 | 0.89780 | 0.89785 | 0.89655 |
| 3 | 0.84156 | 0.83905 | 0.83572 |
| 3.5 | 0.79343 | 0.79380 | 0.79249 |
| 4 | 0.75619 | 0.75616 | 0.75506 |
| 4.5 | 0.72321 | 0.73109 | 0.72730 |
| 5 | 0.64614 | 0.66462 | 0.66499 |
Source: Bloomberg
*2% coupon has a two-year history. Other coupons have a monthly history from Jan-2012 through Sep-2022.
**TN launched Jan-2016. History is from Jan-2016 through Sep-2022.
The TN correlations ranged from 0.646 to 0.897. The 2.5% coupon produced the highest correlations for all three months. The 5.0% coupon produced the lowest correlations.
Table 4. Correlation of monthly returns for Classic Bond futures and coupon stack of TBA futures
| US | Expiry | ||
|---|---|---|---|
| Coupon | Spot | Spot+1 | Spot +2 |
| 2* | 0.85877 | 0.85939 | 0.85891 |
| 2.5 | 0.83279 | 0.83192 | 0.83028 |
| 3 | 0.77972 | 0.77912 | 0.77625 |
| 3.5 | 0.72540 | 0.72728 | 0.72888 |
| 4 | 0.66711 | 0.66683 | 0.66664 |
| 4.5 | 0.63249 | 0.63260 | 0.62608 |
| 5 | 0.49008 | 0.50991 | 0.51138 |
Source: Bloomberg
*2% Coupon has a two-year history. Other coupons have a monthly history from Jan-2012 through Sep-2022).
The US correlations ranged from 0.490 to 0.859. The 2.0% coupon, with the shortest history, produced the highest correlations for all three months. The 5.0% coupon produced the lowest correlations.
Please refer to the charts below for the summary charts by TBA contract month.
Chart 1. Correlation of monthly returns for select Treasury futures and coupon stack of TBA futures for the nearby contract month
Chart 2. Correlation of monthly returns for select Treasury futures and coupon stack of TBA futures for the second contract month
Chart 3. Correlation of monthly returns for select Treasury futures and coupon stack of TBA futures for the third contract month
Gain access to the MBS market
TBA futures trade via an all-to-all electronic order book, bringing equal access, transparent price discovery, and streaming liquidity to the Mortgage-Backed Securities (MBS) market.
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.
