Mortgage Rate (OB30C) futures (Globex Code: MGE) are cash-settled to the Optimal Blue 30-Year Fixed Rate Conforming Index (Bloomberg ticker: OB30C Index)1 . These contracts should be an effective hedging tool for mortgage originators, mortgage servicers and anyone holding conventional 30-year loans as assets on their books or balance sheet.
This paper discusses spreads between Mortgage Rate futures, 5-Year Treasury Note futures and 30-Year UMBS TBA futures (primary-secondary spread). The spread with the 5-Year Note futures will be available at launch with pre-defined spreads and implied pricing.
5-Year Note Treasury futures have frequently been cited as a hedging tool for TBAs and Mortgage Rate futures. This application may be partly attributable to similar DV01s. For example, on December 17, 2024, March 2025 5-Year Note futures had a DV01 of $40.19 based on our Treasury Analytics tool. Meanwhile, the January 2025 5.5% TBA had a DV01 of $34.36, according to our Mortgage Analytics tool provided by MIAC Analytics. Please refer to the Mortgage Basis whitepaper for more details.
At launch, Mortgage Rate futures will have implied inter-commodity spreads with the 5-Year Note Treasury futures (ZF). The listing convention will consist of the three nearest MGE months vs. the nearest ZF month, plus one deferred ZF. The listed spreads at launch will be:
MGEG5 vs ZFH5;
MGEH5 vs ZFH5; and
MGEH5 vs ZFM5.
Due to the similar DV01s, the spreads will have ratios of 1:1 with a hedge ratio of 0.0500.
Please refer to the chart below for the price histories of ZF, 5.5% TBA futures since launch, and the implied price of Mortgage Rate futures. Note that TBA futures were launched in late 2022.
Price histories of ZF, 5.5% TBA since launch and implied price of Mortgage Rate futures
1 Pending all relevant regulatory review periods and/or approvals, see the SER for details.
CME Group has produced the monthly correlation between Mortgage Rate futures, the most active (aka current) coupon of TBA futures (5.5%) and the 5-Yr Note Treasury futures. TBA futures were listed in November 2022, hence the two-year history from December 2022 through December 2024
Correlation of monthly returns between ZF, 5.5% TBA since launch of TBA and Mortgage Rate futures
|
TBA vs 5yr Treasury |
5yr Treasury vs Mortgage Rate |
TBA vs Mortgage Rate | |
|---|---|---|---|
| Full History | 0.861110248 | 0.765847442 | 0.7796116 |
| 1 Year | 0.890421737 | 0.756602421 | 0.770125934 |
| 6 Months | 0.827543432 | 0.737593667 | 0.728053643 |
| 1 Month | 0.918642178 | 0.654585194 | 0.610187612 |
Sources: CME Group and Optimal Blue
One month represents the most recent month, Nov. 13 to Dec. 13, 2024. Six months is June 13 to Dec. 13, 2024. One year is Dec 13, 2023 to Dec 13, 2024. The full history is from Dec. 12, 2022 to Dec. 13, 2024.
Note the similar correlations of price returns for all three instruments ranging from 0.766 to 0.861. These correlations suggest that each of these futures contracts is complementary rather than a substitute. The spread between TBA futures and Mortgage Rate futures, which must be legged using an independent software vendor (ISV) at launch, is a means to a view on the primary-secondary spread, which is the difference between mortgage rates for borrowers (Mortgage Rate futures/primary) and yields on newly issued agency mortgage-backed securities (TBAs/secondary).
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.
