With US Treasury issuance expected to rise dramatically in the coming quarters, the deliverable baskets underpinning Treasury futures could see a significant boost going forward.
Based on the May refunding announcement, we’ve projected how the expanded issuance will impact the deliverable basket for each contract below.
2-Year Note futures (ZT)
The 2-Year Note delivery basket, already on course to spike as 7-years are reissued and 5-years enter the basket, will see additional growth as bigger 2-year, 3-year, and 5-year auctions roll into upcoming contract eligibility.
3-Year Note futures (Z3N)
The 3-Year Note’s delivery basket could see the biggest increase, driven by expanded 3-yr issuance (extra $2B/month through year-end), and CME Group’s plans to bolster the deliverable basket with aging 7s on July 13.
5-Year Note futures (ZF)
5-year auctions are expected to increase by $2B per month through year-end.
10-Year Note futures (ZN)
May’s 10-year auction was largest ever, and 7-year auctions are expected to increase by $3B per month through year-end.
Ultra 10-Year Note futures (TN)
With a focused basket to ensure precise 10-year exposure, Ultra 10’s basket will see a modest increase going forward.
Classic T-Bond futures (ZB)
Over the next three months, the US Treasury will issue $54B in 20-yr bonds. With the new issuance eligible for delivery into T-Bond futures, the Classic Bond's deliverable basket should see a significant increase in notional size and eligible CUSIPs, even under conservative estimates.
The new 20-year bond will mature on May 15, 2040. It is currently trading as the When Issued (WI), spread against the 3% of Nov 15, 2045 on BrokerTec. The 3% of Nov 2045 is currently the Cheapest-To-Deliver (CTD) for the Ultra Bond futures Jun and Sep 2020 contract months. Importantly, the new WI May 15, 2040 will belong to the delivery basket of the Classic Treasury Bond futures contract. Therefore, the cash WI May 2040 versus the 3% of Nov 2045 spread is similar to the Bond-Ultra (BOB) yield curve spread on CME Globex. This relationship provides a rich set of risk management, spread and box trading strategies.
For more on the 20-year bond, read our recent article: The 20-Year Bond in a Brave New World
Ultra T-Bond futures (UB)
With the Treasury planning to shift financing from bills to longer-dated tenors over the coming quarters, the Ultra Bond’s basket could see a boost going forward.
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