BrokerTec 20-year in 2021: What’s Old is New

The 20-year bond was reintroduced by the US Treasury in May 2020 to increase overall issuance without saturating the 10-year note and 30-year bond, which were already seeing record auction sizes. This was also part of a strategy of shifting issuance further out in the curve to take advantage of historically low rates, which had fallen below those seen during the last period of aggressive policy cuts following the 2008 global financial crisis.

Approaching its first anniversary, the new bond has enjoyed a recent uptick in trading activity on BrokerTec due to a confluence of factors: a general rise in long-end interest rates as the yield curve pivots, enhanced liquidity and ease of trading following BrokerTec’s migration to the Globex trading platform, a yield premium and price discount relative to its neighbors on the curve, and a vocal boost from the Treasury and Federal Reserve.

As the newest of the BrokerTec US Treasury benchmarks, the 20-year bond had its work cut out to match the success of the long-established 10-year and 30-year, which trade nearly $50 billion a day in combined notional.

In terms of risk transfer measured by DV01, the dollar value of a single basis point move in yield, the 20-year grew to average around 5% of the overall Treasury Note and Bond complex during its first few months of trading. However, during Q1 2021 it saw several spikes to the 10-15% range, surging to nearly $17 million in shifted daily risk. This matches the averages seen for the leading risk management tenors, the 5- and 10-year, and points to strong upside potential.

Source: BrokerTec

Two new features have helped this momentum build: the BrokerTec US Treasury migration to Globex on February 1 and the launch of RV Curve¹ on March 24. With the integration of BrokerTec’s Global Front End into Globex², participants have been able to trade the US Treasury benchmarks, including the 20-year alongside their CBOT Treasury futures counterparts as well as other CME Group Interest Rate products³.

The addition of RV Curve allows trading of hedged pairs across the curve, with the execution risk of individual transactions removed. Two pairs involving the new 20-year bond, the 2:1 ratio 10-year/20-year, and the 3:2 ratio 20-year/30-year saw activity within the first week. In the latter case, participants who previously used a combination of 10-year and 30-year transactions to replicate durations in between those tenors can now more precisely target the longer end of the curve, with the UB20:30 pair showing more than 95% correlation to daily outright yield changes.

Additionally, the 20-year shows a very high correlation with the CBOT Long Bond future. While the 20-year bonds do not yet compete for cheapest to deliver (CTD) in the Bond futures basket – currently that is an aged 30-year with around 17 years remaining in term to maturity – they do track the future’s daily price movement very closely and have a 99.6% correlation, opening up the possibility of an alternative 20-year basis trade.

With the 20-year less established than the 10-year or 30-year, prices remain lower and yields higher than an extrapolation from its mates to either side might suggest. While this has been good news for those looking to augment their long-term portfolios, it became much more relevant to trading participants following the Treasury’s vote of confidence⁴ on April 8.

Singling out the 20-year as having developed a particularly healthy secondary market among other debt instruments, the Treasury noted its expectation that it would continue to grow as a benchmark. This dovetailed with statements by the Federal Reserve’s Federal Open Market Committee (FOMC) that its purchases were shifting away from TIPS and toward the 20-year, in order to better match the composition of new US debt issuance⁵. As expected, the market reaction was immediate, with the 20-year yield falling three basis points near the close and seven for the day.

It’s clear that during the 2020 runup in government debt, demand initially met ‒ and at times ‒ exceeded supply before leveling off as the market digested the new normal and questioned whether there was further appetite for such large ongoing auctions, causing long end yields to rise. Enhancements to the BrokerTec market made it easier to express a view on interest rate direction, and the 20-year specifically received added attention from market participants.

With the unique combination of being new, straddling two established benchmarks, offering a relatively high yield (low purchase price), and seeing official sector support on the supply side via Treasury issuance and on the demand side via FOMC QE purchases, the 20-year has multiple factors impacting its trajectory. This focused attention and increased hedging activity is certain to grow as it finds its place on the changing yield curve.

U.S. Treasury products are offered by BrokerTec Americas LLC, a FINRA registered Broker Dealer and SIPC Member.

1. BrokerTec RV Curve launch:  https://www.cmegroup.com/education/articles-and-reports/introducing-brokertec-rv-curve.html
2. BrokerTec Globex migration:  https://www.cmegroup.com/media-room/press-releases/2021/2/02/cme_group_completesmigrationofbrokertectradingplatformtocmeglobe.html
3. CME Group Interest Rates:  https://www.cmegroup.com/markets/interest-rates.html
4. U.S. Treasury press release: https://home.treasury.gov/news/press-releases/jy0116
5. Federal Reserve FOMC statement: https://www.newyorkfed.org/newsevents/speeches/2021/log210408