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Case Study

3 September 2021

Trade the When Issued security a month in advance using Micro Treasury Yield futures

By CME Group

CLIENT(S):

Fund/portfolio managers and dealers

CHALLENGE:

Efficiently roll cash treasury positions when one wants.

SOLUTION:

Sell the current month Micro 10-Year Yield futures and buy the second month.

Overview:

To keep an investor’s portfolio in the most liquid on-the-run Treasury 10-year note, a portfolio manager needs to sell $10 million of the August 2031 Note and purchase the November 2031.  This requires that he “roll” the security by selling the older issue and buying the new security. 

Looking at the US Department of Treasury tentative auction schedule, he sees that the Treasury will announce the new 10-year on November, auction it on November 9, and it will settle on November 15.  According to Liberty Street Economics, a research arm of the Federal Reserve Bank of New York, trading of the When Issued (WI) security happens mostly around the auction and a few days before issue. So much activity in a short window can make rolling difficult.

The construction of the Micro Treasury Yield futures now gives investors and traders the ability to trade the WI weeks in advance. Micro Treasury Yield futures from CME Group are listed for the nearest two months and settle to the BrokerTec benchmark, an index based on the on-the-run treasury security.

Approach:

On October 8, the investor seeks to extend his risk and would like to roll into the November security well before it is announced. He calculates the risk on the current August 2031 security as an approximately $9,150 dollar value of a basis point (DV01). He also knows that the maturity of his security is not 10 years, but 9 years and 10 months (10/12 months, or 0.83 years).  He estimates the risk on the new November security by scaling up the calculated DV01 and multiplying by the ratio of remaining terms to maturity:

He knows that the Micro Treasury Yield futures each have a DV01 of $10 per contract. He can sell 915 ($9,150 /$10) October 2021 Micro 10-Year Yield futures and buy 930 ($9,300/$10) November 2021 contracts. This trade has extended his risk profile to that which will match the new November 2031 treasury note profile.

The October 2021 Micro 10-Year Yield futures will expire at the end of October. The investor will need to sell his August 2031 security at the October expiry of the Micro 10-Year Yield future or sell the security and cover the short at the same time before expiry. He can then bid for the November 2031 note at the auction or purchase the new security sometime during November and sell the November Micro 10-Year Yield futures at the same time.

The sequence of the trades is as follows:

  1. Holding $10 million August 2031 10-year notes in the portfolio
  2. October 8:
    • Sell 915 of the October 2021 Micro 10-Year Yield futures
    • Buy 930 November 2031 Micro 10-Year Yield futures
  3. Sell the August 2031 note and close out (buy back) the short October 2021 Micro 10-Year Yield futures on or before expiry.
  4. November 3, 2021 or later, buy November 2031 notes at auction and close out (sell) the long November 2021 Micro 10-Year Yield futures at same time.

Results:

The investor successfully rolled his 10-year treasury position at a time of his choosing using Micro Treasury Yield futures from CME Group. This better allows him to time the market and replicate the risk that he seeks in the portfolio.

Find your solution:

Let CME Group help you find a solution to your challenge.

To speak to a member of our Interest Rates team about how our offerings can help you, contact us:

interestrates@cmegroup.com

Micro Treasury Yield futures are cash-settled to BrokerTec US Treasury benchmarks, offering direct exposure to on-the-run US Treasuries at key points on the curve, with yield-based pricing, and fixed DV01 and duration.

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