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


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.

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