_{*Subject to change}

^{Source: CME Group}

Yield futures represent a distinct innovation building on the established bond futures products: Yield futures are cash settled, priced in yield and are linked to a specific on-the-run security, in contrast to the physical delivery, price-based trading, and basket-based tracking of existing Treasury futures. For more information on Yield futures, visit Understanding Yield futures.

Micro Treasury futures are cash settled, 1/10 size versions of the extant Treasury futures. They are traded on price, track a basket of deliverable securities, and settle to the prices of their respective standard Treasury futures. To learn more about Micro Treasury futures, visit Understanding Micro Treasury futures.

The smaller contract size of both the Micro Treasury and Yield futures allows for greater precision and customization in position management. Traders can tune their positions more precisely to reflect their market views and risk tolerance, without being constrained by the larger contract size of the standard Treasury futures. This granularity in position sizing can be particularly advantageous in volatile or uncertain market environments, where smaller position sizes can help mitigate risk and preserve capital.

Unlike traditional Treasury futures, which list three quarterly contracts, Micro Treasury futures will list the nearest two quarterly contract months. Yield futures are listed on a monthly basis, with the nearest two monthly contracts being listed.

Expiring contract months of Micro Treasury futures terminate on two business days prior to the first delivery day of the named contract month. The final settlement price for Micro Treasury futures is the 2:00 p.m. CT settlement price for the corresponding standard Treasury contracts on that day. 

The final settlement for the Yield futures is the BrokerTec U.S. Treasury Benchmark 3:00 ET fixing rate for the last day of such expiring contract’s delivery month as determined by CME Group Benchmark Administration Limited.

Price and yield exhibit an inverse relationship. As economic conditions evolve, the interest rate may shift while the coupon payments on a security remain constant throughout its lifespan. If an individual owns a security and the prevailing interest rate rises, the fixed coupon payments become less attractive in comparison to the higher market rates, leading to a decrease in the value of the security. If the owner decides to sell the security, they would likely receive a lower price, reflecting this decrease in value. This illustrates the inverse relationship between price and yield – as the price of the security falls, the yield increases.

The two contracts differ in how they are traded. Micro Treasury futures are price quoted like the standard Treasury futures, with price changing depending on their underlying yield. Yield futures, on the other hand, are quoted in yield. The price represents the cost of purchasing a Treasury security, while the yield indicates the effective interest rate the investor will receive, adjusted for the price and the coupon rate. 

This distinction is important as it highlights the two different use cases of each contract that traders can use to address their positions and market conditions.

As shown in Exhibit 2 and 3 above, the correlation between the Micro Ultra 10-Year futures and the 10-Year Yield futures is -0.997, and the correlation between the Micro Ultra Bond futures and the 30-Year Yield futures is -0.991, indicating a strong inverse correlation between the two types of futures.

For Micro Treasury futures, prices shall be quoted in points and fractions of a point as with our existing Treasury futures. Due the contract size being $10,000 rather than $100,000, each point is worth $100 rather than $1000. 

Yield futures feature a contract size of $1,000 x the index points. Gains or losses on a contract position are calculated by determining the number of Interest Rate basis points (bps) by which the contract price has moved, then multiplying by the value of one bp per contract. Each basis point of the Yield futures contract interest is worth $10. 

An important distinction between the two contracts is the approach each takes toward risk exposure.

Micro Treasury futures are defined by a constant notional of $10,000 and follow the cheapest-to-deliver CUSIP, leading to a risk exposure level that varies along the yield curve as well as with respect to outright price level. DV01 (dollar value per 1 basis point) is determined by the DV01 of the underlying CTD cash security and varies over time and maturity. 

Yield futures offer a fixed risk exposure, set to $10 DV01 (dollar value per basis point of yield move). This constant DV01 also removes the convexity, or nonlinear relationship between price and yield. The on-the-run or most recently issued CUSIP will always be the reference point for the Yield futures and will also maintain a relatively fixed duration, moving no more than a month.

Each Micro Treasury futures has two separate ICS with implied pricing enabled. First, they have spreads with 1:10 ratios for the extant Ultra Treasury futures (TN:MTN, UB:MWN). Second, they have a yield curve spread that will mimic the ratio of the existing NUB (TN/WN) spread. For example, for the June 2024 ICS, the NUB has a ratio of 5:2. The MNUB (MTN/MWN) has the same ratio of 5:2. 

Yield futures were designed to uphold a consistent risk exposure. The uniform DV01 of $10 across the entire curve facilitates straightforward ICS calculations and hedging. It allows for the hedging of any pair of points on the curve by employing a 1:1 ratio with the two Yield futures in the opposite direction.

Suppose that a trader believes that Treasury yields will increase. The trader can either engage in a long Yield futures or a short Micro Treasury futures position. A hypothetical trade is demonstrated below:

On February 1, 2024, the yield on the 10-Year Yield futures contract was 3.846, and the price on the Micro Ultra 10-Year futures contract was 117.828. Suppose that a trader believes that yields will rise, and consequently, prices will fall. With this view, the trader enters in one of the following positions:

Long position of ten 10-Year contracts @ 3.846

OR

Short position of ten MTN contracts @ 117.828

Two weeks later on February 15, 2024, the 10-Year Yield futures contract had risen to 4.240, and the price of the Micro Ultra 10-Year futures contract had fallen to 114.125, confirming the trader’s hypothesis. Both trades were profitable, as can be seen in Exhibit 6 below:

_{Source: CME Group}

The 10-Year Yield futures increased by 39.4 basis points (4.240 minus 3.846), and with a DV01 of $10, we know that the value of each contract in the leg increased by $394.00. Since ten contracts were traded, the value of the leg increased by $3940.

The Micro Ultra 10-Year futures leg has increased by a value of $3.703 (117.828 minus 114.125). Since there are ten contracts, and the contract defines $100 per price point, the total value of this leg has increased by $3703.

Consider a different scenario in which yields fall:

On January 18, 2024, the yield on the 10-Year Yield futures contract was 4.142, and the price on the Micro Ultra 10-Year futures contract was 115.297. The trader believes that yields will rise and enters in one of the following positions:

Long position of ten 10-Year contracts @ 4.142

OR

Short position of ten MTN contracts @ 115.297

Two weeks later on February 1, 2024, the 10-Year Yield futures contract had fallen to 3.846, and the price of the Micro Ultra 10-Year futures contract had risen to 117.828, leading to a loss for the trader.

_{Source: CME Group}

As can be seen in Exhibit 7, the 10-Year Yield futures position has incurred a loss of $2960 (-29.6 bp * 10 DV01 * 10 contracts), and the Micro Ultra 10-Year futures short position has lost $2531 (-2.531 * $100 per price point * 10 contracts).

The difference in the profit or loss of the two positions can be attributed to (1) differences in initial DV01 and (2) differences in convexity. 10-Year has a constant DV01 of $10, while MTN has a DV01 that moves with the DV01 of the CTD that the price of the standard Ultra 10 contract tracks (assuming no switch in the CTD). For example, as of February 23, 2024, according to the Treasury Analytics tool, the Jun-24 contract month had a DV01 of $86.89 for the Ultra 10-Year Note. Since the Micro Treasury futures represent approximately 1/10 the risk of the extant Ultra Treasury futures, we can estimate the Jun-24 contact month for the Micro Ultra 10-Year Note had a DV01 of $8.69. 

With a constant DV01 of $10, Yield futures do not exhibit convexity. Meanwhile, MTN inherits the convexity of the corresponding CTD (assuming no switch in CTD). The combination of the lower initial DV01 of MTN and convexity leads to the above differences in profit/loss where 10-Year generates greater profit (loss) than MTN for a given fall (rise) in yield. 

To visualize movements in Treasury futures prices over time and compare those with both the BrokerTec U.S. Treasury Benchmark cash yields and constant maturity rates (par rates) published by the U.S. Department of the Treasury, visit the Treasury Analytics – CurveWatch tool from CME Group.

Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Swaps trading should only be undertaken by investors who are Eligible Contract Participants (ECPs) within the meaning of Section 1a(18) of the Commodity Exchange Act. Futures and swaps each are leveraged investments and, because only a percentage of a contract’s value is required to trade, it is

possible to lose more than the amount of money deposited for either a futures or swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles and only a portion of those funds should be devoted to any one trade because traders cannot expect to profit on every trade.

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The information within this communication has been compiled by CME Group for general purposes only. CME Group assumes no responsibility for any errors or omissions. CME Group does not represent that any material or information contained in this communication is appropriate for use or permitted in any jurisdiction or country where such use or distribution would be contrary to any applicable law or regulation.

Additionally, all examples in this communication are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience. All matters pertaining to rules and specifications herein are made subject to and superseded by official CME, CBOT, NYMEX and COMEX rules. Current rules should be consulted in all cases concerning contract specifications.

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