Interest Rate futures produced a fourth consecutive record year in 2019, with annual growth of 4% as investors increasingly turn to futures for liquid, capital-efficient, and off-balance-sheet interest rate exposure.
Liquidity can be defined broadly as a market participant’s ability to convert assets into cash or to enter/exit a position with ease; and is therefore proportional to indicators such as average daily trading volume, breadth of participation, book depth and open interest. The following summarizes performance in those four key liquidity measures.
In 2019, average daily volume (ADV) grew 4% compared to 2018’s record levels.
|Product group||2019 ADV||% chg vs 2018||% growth vs 2014|
|Interest Rate F&O||10,348,659||4%||48%|
|Fed Fund futures||356,010||37%||1036%|
Increase in Treasury futures activity driven by key growth initiatives:
Interest Rate futures markets have achieved broad participation by an increasingly diverse user base, as evidenced by the number of large open interest holders (LOIH) tallied in the CFTC weekly Commitment of Traders report. Aggregate LOIH is a fair proxy for overall market participation among firms holding significant positions. During 2019, average weekly aggregate LOIHs increased by 1% to 2,138 with significant contributions from 2-Yr. Notes, Fed Funds and recently launched products such as Ultra 10-Yr. and SOFR futures.
|CFTC reportable LOIH position size in contracts ($ notional)||2019 avg weekly LOIH||% chg vs. 2018||% growth vs. 2014|
|2-Year Note (ZT)||1000 ($200M)||356||5%||44%|
|5-Year Note (ZF)||2000 ($200M)||333||-4%||21%|
|10-Year Note (ZN)||2000 ($200M)||399||-10%||10%|
|Ultra 10-Year Note (TN)||2000 ($200M)||109||8%||N/A (Launched in 16’)|
|Bond (ZB)||1500 ($150M)||182||-1%||7%|
|Ultra Bond (UB)||1500 ($150M)||133||6%||60%|
|Eurodollar (GE)||3,000 ($3B)||302||-1%||-11%|
|Fed Funds (ZQ)||600 ($3B)||156||3%||90%|
|3M SOFR (SR3)||25 ($25M)||42||68%||N/A (Launched in 18’)|
|1M SOFR (SR1)||25 ($125M)||64||147%||N/A (Launched in 18’)|
|10-Year MAC Swap (N1U)||25 ($2.5M)||43||-10%||-28%|
|5-Year MAC Swap (F1U)||25 ($2.5M)||33||0%||-38%|
|10-Year Eris Swap (LIY)||25 ($2.5M)||20||N/A (Launched in 18)|
|5-Year Eris Swap (LIW)||25 ($2.5M)||20||N/A (Launched in 18)|
Record volume, open interest, and breadth of participation in the face of higher volatility clearly demonstrate the health and resiliency of the Treasury futures markets. Prior research concludes that book depth and volatility are negatively correlated. Therefore, book depth tends to decrease when market volatility is elevated. In 2019, increasing volatility appears to have contributed to less size available in Treasury futures order books than in 2018. Please refer to the table below for average monthly historical volatility and book depth. Note the significant YoY increases in volatility for each Treasury futures product.
|Monthly H. Volatility*||Avg Book Best Bid/Offer||Avg Book Best 3 Bid/Offers|
|2-Yr Note (ZT)||1.3%||0.7%||0.6%||1,861||99,471||11,437||5,784||131,254||40,270|
|5-Yr Note (ZF)||3.0%||2.1%||2.5%||1,024||1,319||712||5,293||6,632||3,960|
|10-Yr Note (ZN)||4.4%||3.3%||3.8%||1,918||2,507||1,403||9,458||12,322||8,169|
|Ultra 10-Yr Note (TN)||5.7%||4.3%||N/A**||236||246||N/A**||1,302||1,388||N/A**|
|Ultra Bond (UB)||11.3%||8.7%||9.1%||85||110||83||434||580||461|
Outright front-month only, measured during regular trading hours (7:00 am to 4:00pm, CT)
*Monthly average for 21 days
**TN launched in January 2016
12019 vs. 2014 is not an accurate comparison as the contract’s CTD, CF and DV01 changed significantly due to the jump across the five year gap during roll activity in February 2015
On 13 Jan 2019, CME reduced the minimum price increment of 2-Yr. Note futures to 1/8th (from 1/4th). Following the tick size reduction, customers are benefiting from increased price discovery and cost-effective execution. The bid/ask spread is consistently 1/8th during U.S. hours with 1861 contracts at the new top of book. The average order book for the three best bid/offers was 5784 contracts. In 2019, the average cost of crossing the bid/ask spread dropped 49% for orders as large as 1861 contracts (from $16.10 in 2018 to $8.25 in 2019) . Please refer to the chart below for a comparison of the implied execution cost pre (2018) and post (2019) tick cut. After the tick cut, 2-Yr. Note futures established new record volume, open interest and large open interest holders.
Average daily open interest (ADOI) grew 17% in 2019. The Interest Rate futures and options complex established a new record for daily open interest of 110M contracts on 13 June 2019.
|Product Group||2019 ADOI||% Chg vs 2018||% Growth vs 2014|
|Interest Rate Futures & Options||93,734,590||17%||99%|
|Fed Fund Futures||2,034,042||3%||338%|
Read our original whitepaper, The New Treasury Market Paradigm
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