Micro Treasury Yield futures ‒ Find answers to frequently asked questions

1. How are Micro Treasury Yield futures different than existing Treasury futures?

While complementary to CME Group’s existing suite of Treasury futures, Micro Treasury Yield futures feature an entirely new contract design intended to serve new use cases and provide market participants with an expanded set of trading and risk management capabilities for the US government bond market. Micro Treasury Yield futures are cash settled, traded in yield, and track a single on-the-run security ‒ whereas existing Treasury futures are physically delivered, traded in price, and track a basket of deliverable securities. Further, these products maintain a static basis point value of $10 across all tenors, making spread trading seamless and straightforward. 

2. What is the difference between price and yield?

US Treasury Notes and Bonds typically have a par amount (which is the dollar amount of the loan) and a coupon rate (which is the amount of interest paid to the lender twice a year). Over time, the consensus interest rate level might change while the coupon payments remain the same over the life of a note or bond. Therefore, if one were holding a Note and the prevailing interest rate went up while they were holding it, that Note would be worth less (the coupon interest payments would be less than the prevailing market interest rate). So, if they were to sell that note, the price they could command would decline. In this way, price and yield have an inverse relationship to one another. 

Put another way, the price is simply the price that one would pay for a note or bond and the yield is the interest the buyer would receive adjusted for the price and the coupon rate. These new contracts remove the need to convert a price to yield, which is the common metric quoted in most financial press outlets.

3. What does on-the-run mean?

The "on-the-run" security is defined as the most recently auctioned security. The US Treasury maintains a set and published schedule of the days on which it will auction new Notes and Bonds for each tenor (years to maturity). For example, a new 5-Year Note will be auctioned on Wed, August 25, and so the “on-the-run” 5-Year will be this security until the Treasury issues a new 5-Year note on September 27. The on-the-run security is the most commonly-quoted yield on most financial news outlets.

4. The US Treasury market is a very large debt market. How does CME Group determine the precise price/yield of the on-the-run security?

The Micro Treasury Yield futures contract will track the BrokerTec US Treasury Benchmark which will reflect the yield of the on-the-run security. The BrokerTec benchmark is sourced from transactions on the leading cash US Treasury trading platform.

Because the 5-Year benchmark on the futures expiration day (end of the month) will reflect the yield of the on-the run security, when Yield futures begin trading on August 16, they will anticipate the upcoming auction (August 25), and therefore be available as a tool to manage the July-August cash roll. In other words, because the on-the-run security will change on August 25, the new futures contract will reflect yield of this new issue and provide the market with an indicative value for the July-August cash market roll.

5. What is the difference between cash settled and physically delivered?

  • Futures contracts that are cash settled (like the Micro Treasury Yield futures) simply expire in a cash transaction on their expiration date and cease to exist. The holder of a cash-settled futures contract no longer has a position in the market after expiration.
  • Futures contracts that are physically delivered expire with an actual delivery of the physical commodity or financial instrument. For example, someone that held a long position in the current CME Group Treasury futures contracts until expiration would be obligated to take delivery of actual Treasury notes or bonds. 

6. Why trade Micro Treasury Yield futures?

Micro Treasury Yield futures’ straightforward, yield-based design is both highly approachable and well suited to a variety of trading and risk management applications, including:

  • The US Treasury securities market is, by many measures, the largest, most active debt market in the world. The US risk-free interest rate impacts the prices of many different asset classes including equities, currencies, and commodities.
  • Gain exposure to on-the-run Treasury yields
  • Seamlessly execute DV01 neutral yield curve spreads
    • The DVO1 is defined as the dollar value of one basis point. These products are constructed such that each basis point (.01 of one percent) change in yield, represents a $10 move for each futures contract held. Because the “DVO1” is a static $10 AND consistent across the 2-,5-,10-, and 30-Year maturities, it makes trading Treasury spreads straightforward. 
  • Hedge Treasury auctions with greater precision
  • Trade the futures vs. cash basis via EFP (exchange for physical)

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