Introducing Micro Treasury Yield Futures

Increased US Treasury issuance and the need to manage interest rate exposure have spurred calls for additional risk management tools. Micro Treasury Yield futures offer simplified, streamlined, and linear instruments for tracking UST yields in a more granular way.

Rates shrink, interest grows

With nearly 13.5 million contracts of open interest, representing over $1.5 trillion in notional value, the US Treasury futures complex at CME Group provides one of the financial market’s deepest liquidity pools for management of interest rate risk for US government debt. However, given the unprecedented growth in underlying issuance, and the unique position of UST Notes and Bonds in the overall debt market, demand has grown for tools that broaden access to rates exposure.

The Micro Treasury Yield futures contracts allow market participants direct exposure to US Treasuries at key points on the curve, with yield-based pricing, cash settlement, and fixed DV01 and duration:

Contract

Symbol

Micro 2-Year Yield futures1

2YY

Micro 5-Year Yield futures2

5YY

Micro 10-Year Yield futures3

10Y

Micro 30-Year Yield futures4

30Y


Key parameters

The most noticeable difference between the Micro Treasury Yield futures and other interest rate futures is pricing directly in annual yield, as determined by the corresponding BrokerTec US Treasury benchmarks5 for on-the-run CUSIPs. With a contract value of $1,000 per index point, and a minimum tick of 0.001 or 1/10 basis point, this allows a minimum price fluctuation of just $1.00 per contract.

Because the US Treasury holds auctions at each tenor once per month, liquidity will be concentrated in a single contract, with a second available for the roll at month end. Cash settlement to the benchmark on the final business day of the month will remove any operational risks of physical delivery.

Micro Treasury Yield futures shared specifications

Settlement

Cash-settled to BrokerTec benchmarks

Price convention

US Treasury Yield

Contract size

$1,000 x Index points ($10.00 DV01)

Tick size

$1.00 (1/10 of 1 bp)

# of expiries

2 nearest monthly contracts

Termination

Last business day of the named month


BrokerTec benchmarks

For settlement purposes, the BrokerTec US Treasury benchmarks6 were chosen for their robust transaction base and deep liquidity. Overseen by CME Group Benchmark Administration, they provide snapshots of average market pricing in the 2-, 5-, 10-, and 30-year on-the-run (OTR) CUSIP, and are aligned with IOSCO Principles.

Each tenor sees monthly auctions, with the sizes for the two most recent quarterly cycles included below:

Auction size ($B)

2yr

3yr

5yr

7yr

10yr

20yr

30yr

Feb-21

60

58

61

62

41

27

27

Mar-21

60

58

61

62

38

24

24

Apr-21

60

58

61

62

38

24

24

May-21

60

58

61

62

41

27

27

Jun-21

60

58

61

62

38

24

24

Jul-21

60

58

61

62

38

24

24

Source: Treasury.gov

As BrokerTec lists each new cash OTR contract for trading, the BrokerTec US Treasury benchmarks in turn are calculated as volume weighted average yields (VWAYs) across the 15-minute periods immediately preceding these times: 11:00 a.m., 3:00 p.m., 4:00 p.m., and 5:00 p.m. ET.7

Of these, the 3:00 p.m. ET (2:00 p.m. CT) fixings are on average the most liquid and align with the settlement time of existing US Treasury futures at CME Group.


Benchmark robustness

On February 1, 2021, BrokerTec cash Treasuries transitioned to CME Globex. Over the subsequent four months through May, total daily trading averaged approximately $100 billion, never dropping below one third that.

From the start of 2018 through May 2021, average volumes per 15-minute VWAY interval are shown below:

ADV ($MM)

2 yr

5 yr

10 yr

30 yr

11 a.m. ET

554

1,267

1,092

307

3 p.m. ET

579

1,310

1,150

476

4 p.m. ET

311

763

704

270

5 p.m. ET

274

497

437

151

Source: BrokerTec

For the 3:00 p.m. snapshot, consistently the most robust, monthly averages show not only a significant amount of activity going into each VWAY (half a billion for 2yr and 30yr, over a billion for 5yr and 10yr), but also that volumes remain substantial even in the slowest months:

Monthly ADV ($MM)

2 yr

5 yr

10 yr

30 yr

Min

207

686

699

221

Max

1,571

2,441

1,929

874

Median

583

1,290

1,126

471

Mean

595

1,344

1,172

482

Source: BrokerTec


Constant risk exposure and duration

Traditional US Treasury futures at CME Group are defined by a constant notional of either $100,000 or $200,000, leading to a risk exposure level that varies across the yield curve as well as with respect to outright price level. Micro Treasury Yield futures offer an alternative with a fixed risk exposure, set to $10 DV01 (dollar value per basis point of yield move). This constant DV01 also removes the convexity, or nonlinear relationship, between price and yield.

Contract DV01

Treasury futures*

Yield futures

Risk ratio

2yr

$38

$10

3.8

3yr

$62

 

 

5yr

$51

$10

5.1

TY

$82

 

 

10yr

$132

$10

13.2

US

$195

 

 

30yr

$368

$10

36.8

* Example values from August 2021, subject to market movements

Price movements will look similar to short-term interest rate products such as Federal Funds and SOFR futures, albeit with a smaller contract unit to reflect their status as Micros:

Contract

Unit

30 Day Fed Funds

$4,167 x contract-grade IMM Index

One-Month SOFR

$4,167 x contract-grade IMM Index

Three-Month SOFR

$2,500 x contract-grade IMM Index

Micro Yield Futures

$1,000 x Treasury Yield Index points

Because the on-the-run or most recently issued CUSIP will always be the reference point, the Micro Treasury Yield futures will also maintain a relatively fixed duration, moving no more than a month. This contrasts with the cheapest to deliver (CTD) CUSIP that drives traditional US Treasury futures, allowing swings across the range of the deliverable basket depending on the interest rate environment.

Combining these two features, it is apparent that the Micro Treasury Yield futures serve to complement currently available risk management tools on the yield curve:

Source: CME Group


Spreads and the roll

Having DV01 not only constant but also matched across the curve makes for simpler inter-commodity spread calculation and hedging. Any two points on the curve can be hedged with a 1:1 pair of positions in opposite directions, and the yield difference in basis points can be found by subtracting the price of the two contracts.

Example: with the Micro 2-Year Yield futures at 0.25 and the Micro 10-Year Yield futures at 1.20, the spread is 95 basis points, and a position of one long 2YY and one short 10Y increases (decreases) in value by $10 for each basis point the spread narrows (widens).

The roll is also simplified, which will be increasingly relevant given the monthly auction schedule.  Traditional fixed-notional contracts have slightly different DV01 values between adjacent quarters, requiring “tail” positions to be calculated each roll to match exposure8.  For example, rolling 100 contracts in the expiring quarter may require 105 contracts in the new quarter.  For monthly Micro Treasury Yield futures, the roll ratio will always be 1:1.

Contract specifications

CONTRACT UNIT

$1,000 x Index points ($10 DV01)

PRICE QUOTATION

Percentage points of yield per annum

TRADING and Clearing HOURS

CME Globex:

Sunday - Friday 6:00 p.m.- 5:00 p.m. ET (5:00 p.m. - 4:00 p.m. CT).

Monday - Thursday 5:00 p.m. - 6:00 p.m. ET (4:00 p.m.- 5:00 p.m. CT) daily maintenance period

CME ClearPort:

Sunday 6:00 p.m. ET (5:00 p.m. CT) - Friday 6:45 p.m. ET (5:45 p.m. CT) with no reporting

Monday - Thursday from 6:45 - 7:00 p.m. ET (5:45 - 6:00 p.m. CT)

MINIMUM PRICE FLUCTUATION

0.001 Index points (1/10 basis point per annum) = $1.00

Calendar spreads: 0.001 Index points
Min final settle fluctuation: 0.001 Index points

ComModity CODE

CME Globex: 2YY, 5YY, 10Y, 30Y
CME ClearPort: 2YY, 5YY, 10Y, 30Y
Clearing: 2YY, 5YY, 10Y, 30Y

CME Globex Matching Algorithm

F – FIFO

LISTING SCHEDULE

Monthly contracts listed for two consecutive months

Initial listed months:  August 2021, September 2021

SETTLEMENT METHOD

Financially settled

TERMINATION OF TRADING

Trading terminates on the last business day of the contract month.

BLOCK TRADE MINIMUM THRESHOLD

RTH – 2,000 contracts

ETH – 1,000 contracts

ATH –    500 contracts

BLOCK TRADE REPORTING WINDOW

RTH – 5 minutes
ETH/ATH – 15 minutes


Futures vs. cash tracking

While the Micro Treasury Yield futures differ in several key respects from existing US Treasury futures, it is expected that they will remain closely correlated, with differences representing the market outlook of future differences between the CTD and OTR CUSIPs.

Looking at daily price movements since the start of 2019, the 2yr, 5yr, and 30yr have a 99% correlation, with the 10yr at 98%, but there are also some local departures that could represent trading opportunities:

As Treasury issuance continues to rise, policy uncertainty grows, and more market participants find themselves in need of a hedge for interest rate swings, the Micro Treasury Yield futures will present a path to direct rates exposure with minimal barriers to entry and added complexity.


References

About CME Group

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