Three significant developments took place recently in our TBA/Treasury futures intercommodity spread (ICS) markets to bring more liquidity and efficient trading opportunities to trade the mortgage treasury basis. First, MIAC is now providing the prices and durations that CME Group is using to calculate the DV01s for the TBA/10Year Note futures (ZN) ICS ratios. Please refer to the CME Mortgage Tool for the latest duration and convexity by coupon provided by MIAC Analytics. Second, we enabled the implied pricing of the TBA/ZN ICS markets on March 18, 2024. Third, we will be expanding the suite of Treasury futures on CME Globex to include 5Year Note futures (ZF) around mid 2024. The implied pricing will also be enabled for the TBA/ZF ICS markets.
If you would like to learn more about the impact of implied pricing on our markets, please refer to this recent note, Liquidity in implied intercommodity spread markets, authored by Brendan Wilson of CME Group.
MIAC Analytics, which has been at the forefront of TBA analytics for over 34 years, is used to measure TBA price sensitivities for the mortgage industry’s leading financial institutions. MIAC’s TBA Fixings™ is an industryleading dataset used to accurately and robustly price all the coupons in the TBA market.
MIAC’s TBA Fixings utilize an International Organization of Securities Commission (IOSCO) compliant rule book to create hourly TBA Fixings. These Fixings use actual cleared pricing from 100% of the TBA market. MIAC’s TBA Fixings are published on an hourly basis.
MIAC also uses the hourly TBA Fixings to derive TBA price sensitivities. For each TBA coupon, starting with the 2’s, the fixing of the coupon just above the specified coupon or just below the specified coupon is used to estimate how much the specified coupon’s price would change given either a rally or selloff of 50 basis points in yield. The slope of the price up and the price down is the market implied price sensitivity of the specified coupon. This is referred to as the ImpliedDuration or “IDur”. Similarly, the price up, price down, and Specified Coupon’s Fixing are used to measure the curvature of the three data points. This is the second derivative of the price/yield function and is referred to as the market implied convexity or “ICnx”. Duration measures the bond's sensitivity to interest rate changes. Convexity relates to the interaction between a bond's price and its yield as it experiences changes in interest rates.
AIDurations™/AIConvexities™
MIAC Analytics is used by many leading firms in the mortgage industry to measure the price sensitivity of TBA securities. Measuring the price sensitivities of TBAs is a longstanding industry challenge, and industry thought leaders have adopted multiple methods for estimating TBA durations and convexities. MIAC Analytics supports multiple methods as well. The most accepted methods are constant OAS (OptionAdjusted Spread) and derived intracoupon price spreads. The constant OAS method utilizes complex term structure models, calibrated to current longterm volatility, and empirically derived complex voluntary and involuntary prepayment models. Whereas AIDurations/AIConvexities utilize a more transparent and straightforward methodology. Given the CME Group TBA futures contract, market participants would strongly prefer a highly transparent method, this paper will describe the methodology used to derive the AIDurations and AIConvexities which are then converted to CME Group intercommodity spreads.
AIDurations are not the work of artificial intelligence, but simply the average of market implied durations. How does the market imply a duration? By simply measuring the intracoupon price spread. For example, how much will the price of the TBA 5’s change if interest rates rally by 50 bps (lower bond equivalent yield or bond equivalent yields (BEY’s)? The presumption is that the TBA 5’s will move to be the current price of the TBA 5.5’s. And if the market sells off 50 bps (higher BEY’s), the TBA 5’s price will move to the current price of the TBA 4.5’s. The distinction and valueadd of MIAC’s AIDuration is in the method to derive the TBA prices themselves.
TBA futures DV01s
We have taken the prices and AlDurations provided by MIAC Analytics and calculated a DV01 to provide a uniform risk metric in calculating our hedge ratios. Due to the TBA futures contract size having a notional value of $100,000, as with 10Year Note futures, as a first step, we need to convert the price into notional terms by multiplying the price by $1000. Then, we can calculate the DV01 with the following formula:
DV01=$DV01= 0.01* (Dollar Price*(Duration in percent))
For example, on April 15, 2024, the 5.5% 30Year UMBS TBA had a price of 97.3242 (in decimal terms) and a Duration/AIDur of 4.0347 Years or 0.040347 percent. Here is how to convert the dollar price and the AIDur into a DV01:
DV01=$DV01= $39.267=0.01*($97,324.22*(0.040347))
TBA/Treasury ICS ratios
Since the beginning of 2024, CME Group has been using prices and AIDurations provided by MIAC Analytics to calculate the DV01s for the ICS ratios. And, in contrast with the Treasury ICS ratios which are reviewed and published quarterly, they are reviewed and published monthly to be consistent with the risk in the TBA market. Please refer to the table below for the ratios for the Jul24 TBA/Sep24 ZN spreads and for the DV01s by coupon used to calculate the ICS ratios. Note that the 1:1 ratios will be added on June 17, 2024. The 1:1 spreads will have a minimum price increment (MPI) of ¼ of 1/32. They are expected to augment the spreads with the non 1:1 spread ratios.
30Year UMBS/10Year Note futures Jul/Sep ICS ratios and DV01s
External Spread Name 
Price Ratio 
Leg Quantity Ratio 
Leg 1TBA 
Leg 1# of contracts 
Leg 1DV01 
Leg 2ZN 
Leg 2# of contracts 
Leg 2DV01 

UPN 0405 N4U4 
0.8000 
4:5 
20UN4 
4 
72.70 
ZNU4 
5 
60.89 
UPT 0101 N4U4* 
1.0000 
1:1 
20UN4 
1 


1 

UQN 0708 N4U4 
0.8750 
7:8 
25UN4 
7 
69.41 

8 

UQY 0101 N4U4* 
1.0000 
1:1 
25UN4 
1 


1 

URN 0910 N4U4 
0.9000 
9:10 
30UN4 
9 
68.40 

10 

URY 0101 N4U4* 
1.0000 
1:1 
30UN4 
1 


1 

UTN 0910 N4U4 
0.9000 
9:10 
35UN4 
9 
64.39 

10 

UTY 0101 N4U4* 
1.0000 
1:1 
35UN4 
1 


1 

UUN 0910 N4U4 
0.9000 
9:10 
40UN4 
9 
58.30 

10 

UUY 0101 N4U4* 
1.0000 
1:1 
40UN4 
1 


1 

NTU 0605 N4U4 
1.2000 
6:5 
45UN4 
6 
51.79 

5 

YTU 0101 N4U4* 
1.0000 
1:1 
45UN4 
1 


1 

THN 0504 N4U4 
1.2500 
5:4 
50UN4 
5 
46.16 

4 

THY 0101 N4U4* 
1.0000 
1:1 
50UN4 
1 


1 

UVN 0302 N4U4 
1.5000 
3:2 
55UN4 
3 
39.27 

2 

UVY 0101 N4U4* 
1.0000 
1:1 
55UN4 
1 


1 

UWN 0905 N4U4 
1.8000 
9:5 
60UN4 
9 
33.85 

5 

UWY 0101 N4U4* 
1.0000 
1:1 
60UN4 
1 


1 

UYN 0201 N4U4 
2.0000 
2:1 
65UN4 
2 
27.92 

1 

UYY 0101 N4U4* 
1.0000 
1:1 
65UN4 
1 


1 

^{*FTD of July 1, 2024}
30Year UMBS/5Year Note futures Jul/Sep ICS ratios and DV01s
External Spread Name 
Price Ratio 
Leg Quantity Ratio 
Leg 1TBA 
Leg 1# of contracts 
Leg 1DV01 
Leg 2ZF 
Leg 2# of contracts 
Leg 2DV01 

UPF 0101 N4U4* 
1.0000 
1:1 
20UN4 
1 
76.11 
ZFU4 
1 
40.04 
UQF 0101 N4U4* 
1.0000 
1:1 
25UN4 
1 
69.88 

1 

URF 0101 N4U4* 
1.0000 
1:1 
30UN4 
1 
68.33 

1 

UYF 0101 N4U4* 
1.0000 
1:1 
35UN4 
1 
63.16 

1 

UUF 0101 N4U4* 
1.0000 
1:1 
40UN4 
1 
56.15 

1 

VTU 0101 N4U4* 
1.0000 
1:1 
45UN4 
1 
48.58 

1 

THF 0101 N4U4* 
1.0000 
1:1 
50UN4 
1 
40.56 

1 

UVF 0101 N4U4* 
1.0000 
1:1 
55UN4 
1 
32.59 

1 

UWV 0101 N4U4* 
1.0000 
1:1 
60UN4 
1 
26.53 

1 

UYF 0101 N4U4* 
1.0000 
1:1 
65UN4 
1 
22.27 

1 

^{*FTD of July 1, 2024}
Correlations for 10Year Note futures (ZN/TY) and TBA futures (by coupon)
Please refer to the table below of the correlations of daily returns of 10Year Treasury Note futures and 30Year UMBS TBA based on the rolling front month contract month in 2023.
Table 1: Oneyear history (2023)  Correlation of daily returns for 10Year Note futures (TY) and TBA futures coupon stack for rolling front month
TY AND TBA CORRELATION  

Coupon  Front Month Correlation 
20U  0.8263 
25U  0.8795 
30U  0.8817 
35U  0.8782 
40U  0.8903 
45U  0.8870 
50U  0.8787 
55U  0.8618 
60U  0.8303 
65U  0.3428 
^{Source: CME Group}
The 10Year (TY) correlations ranged from 0.343 to 0.890. The 4.0% coupon produced the highest correlation. The 6.5% coupon produced the lowest correlation.
Example: Spreading 30Year UMBS 5.5% coupon TBA and 10Year Note (55U/ZN) futures
In 2023, the 55U/ZN spread demonstrated a high correlation of 0.8618. The current duration weighted ICS ratio is 3:2. The TBA 5.5% coupon results in a position of 3 contracts per spread (long/short). The 10Year Note futures (ZN) results in an opposite (short/long) position of 2 contracts per spread.
In 2023, we reviewed days with strong correlation and weak correlation between these two markets. Suppose you were short the spread. Therefore, you would have been short 3 of the 55U and long two of the ZN. On the threeday period of strong correlation (9/27/23  9/29/23), you would have incurred a minor loss of $253 by being short the spread. On the day of weak correlation (3/22/233/23/23), during the banking crisis, you would have incurred a profit of $3921 by being short the spread.
Please refer to the table below for the profit and loss of the two periods described above.
Table 2: Profit and loss of 5.5%/10Year Note ICS during strong and weak correlation in 2023
Date 
Spread External Name 
Leg 1TBA Px 
Leg 1 Position 
Leg 2ZN Px 
Leg 2 Position 
Spread Px 
Spread P&L 

3/22/23 
UVN 0302 
101.016 
Short/Sold 3 
113.719 
Long/Bought 2 
75.61 

3/23/23 

101.219 

115.984 

71.689 
3.921 
9/27/23 

96.312 

107.578 

73.78 

9/28/23 

96.547 

107.859 

73.923 

9/29/23 

96.719 

108.062 

74.033 
0.253 
^{Source: CME Group}
Correlations for 5Year Note futures (ZF/FV) and TBA futures (by coupon)
Please refer to the table below the correlations of daily returns of 5Year Treasury Note futures and 30Year UMBS TBA based on the rolling front month contract month in 2023.
Table 3: One year history (2023)  Correlation of daily returns for 5Year Note futures (FV) and TBA futures coupon stack for rolling front month
FV and TBA Correlation  

Coupon  Front Month Correlation 
20U  0.7909 
25U  0.8388 
30U  0.8496 
35U  0.8503 
40U  0.8614 
45U  0.8607 
50U  0.8508 
55U  0.8291 
60U  0.7933 
65U  0.3056 
^{Source: CME Group}
The FV correlations ranged from 0.306 to 0.861. The 4.0% coupon produced the highest correlation. The 6.5% coupon produced the lowest correlation.
Please refer to the chart below for the summary chart for the rolling nearby contract month for both TBA and Treasury futures.
Chart 1. Correlation of monthly returns for 5Year and 10Note Treasury futures and coupon stack of TBA futures for the nearby contract month
Current implied ICS markets
Note that the bid/ask spreads of the implied ICS markets ranged from 0’03 to 0’045 32nds. The top of the order book is at least 10 spreads across the coupon stack. And the spreads with ratios of 1:1 have larger quantities at the top of the spread order book on CME Globex.
Figure 1: 30Year UMBS TBA futures vs. Treasury ICS as of midday on June 13, 2024
TBA/Treasury margin offsets
For example, the total margin requirement for a portfolio consisting of a long position in 10Year Treasury Note (TY) futures and a short position in 30Year 6% UMBS TBA futures (60U) is less than the margin requirement for a standalone long TY position. Using CME Group Clearing margin requirements on April 18, 2024 (given in the table below), the margin requirement for a long TY position is $2,656 per contract, while the total margin requirement of a portfolio that combines a short 60U position is:
($2,656 + $2,250) * (1  70%) = $1,472
Table 4: TBA futures margin requirements

INITIAL MARGIN REQUIREMENT 
MARGIN OFFSET 

5Year Treasury Note futures 
$1,750 
60% 
10Year Treasury Note futures 
$2,656 
70% 
30Year 6% UMBS TBA futures 
$2,250 
70% 
For the 5Year Treasury Note (FV) futures, the total margin requirement for a portfolio consisting of a long position in FV futures and a short position in 30Year 6% UMBS TBA futures (60U) is less than the margin requirement for a standalone long FV position. Using CME Group Clearing margin requirements on April 18, 2024, (given in the table above), the margin requirement for a long FV position is $1,750 per contract, while the total margin requirement of a portfolio that combines a short 60U position is:
($1,750 + $2,250) * (1  60%) = $1,600
For additional deep margin analysis, use the CME CORE tool for single trades or complex portfolios.
Trade the mortgage spread with ease
With improved risk analytics from MIAC, implied pricing with ICS spreads, the addition of 5Year Note futures to CME Group TBA ICS, and significant margin offsets, trading the mortgage treasury basis has never been easier.
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.