Markets Home

Active trader

Hear from active traders about their experience adding CME Group futures and options on futures to their portfolio.

Find a broker

Search our directory for a broker that fits your needs.

CREATE A CMEGROUP.COM ACCOUNT:

MORE FEATURES, MORE INSIGHTS

Get quick access to tools and premium content, or customize a portfolio and set alerts to follow the market.
Market Data Home

Real-time market data

Stream live futures and options market data directly from CME Group.

E-quotes application

Access real-time data, charts, analytics and news from anywhere at anytime.

CME DATAMINE:

THE SOURCE FOR HISTORICAL DATA

Explore historical market data straight from the source to help refine your trading strategies.
Services Home

Uncleared margin rules

Understand how CME Group can help you navigate new initial margin regulatory and reporting requirements.

Calculate margin 

Evaluate your cleared margin requirements using our interactive margin calculator.
Education Home

Now live: ESG solutions

Manage the risk associated with renewable energies, environmental change and sustainable investments.

Create a CMEGroup.com Account: More features, more insights

Get quick access to premium educational content, including expert-led webinars, a real-time trading simulator, and more.
      Course Overview
      • Introduction to STIR Futures
      • Fundamentals and Interest Rate Futures
      • Understanding IMM Price and Date
      • The Link Between Eurodollar Futures Pricing And The Forward Rate Market
      • What is the Eurodollar Settlement Process (cash settled)
      • The Importance of Basis Point Value (BPV)
      • Understanding Convexity Bias
      • What is ICE LIBOR/What is Eurodollar
      • Understanding the FOMC Report
      • Introduction to Fed Fund Futures
      • Introduction to the CME FedWatch Tool
      • What is SOFR
      • Trading SOFR Futures
      • What is SONIA?
      • Trading SONIA Futures
      Understanding STIR Futures
      You completed this course.Get Completion Certificate

      Fundamentals and Interest Rate Futures

      Video not supported!

      When it comes to trading Interest Rate futures, traders have a variety of products to choose from. Short-term products, like Eurodollar and Fed Fund futures, and extending along the yield curve to longer maturity products like 5-year and 10-year Treasury Notes as well as 30-year Treasury Bonds.

      Traders looking to analyze the fundamentals of interest rate futures may review a variety of economic and market information. Some factors that influence pricing of Treasury futures include the level and slope of the yield curve, FOMC interest rate decisions, levels and frequency of U.S. Treasury debt issuance, demand for government bonds, and the overall health of the economy.

      Yield Curve

      The yield curve is a representation of the yield of securities along the various maturity points of the U.S. Treasury curve. For example, the U.S. Treasury regularly auctions securities with maturities of 2 years, 3 years, 5 years, 7 years, 10 years and 30 years. These are known as “on-the-run” securities and their yields are frequently quoted when referring to U.S. interest rates.

      Traders will analyze the level and slope of the yield curve as one point of reference to future interest rates. Sometimes the yield curve will move in a parallel fashion with the yields of short- or long-term securities moving in tandem (parallel move). Sometimes interest rate changes affect one portion of the curve more than the other, causing the curve to steepen or flatten. Analysts will study the yield curve and build models on how they think yields will change for the maturity they are trading.

      For example, someone trading the 2-year Treasury Note may see a larger price change in reaction to an FOMC rate increase than someone trading the 30-year Treasury Bond contract. In this case, the yield curve will shift because of greater price on the shorter-dated maturities versus the longer-dated maturities.

      Federal Open Market Committee (FOMC) Decisions

      FOMC interest rate decisions can have an important effect on the price of interest rate futures. The FOMC influences interest rates by increasing or decreasing the target overnight interest rate (or the effective fed funds rate). The overnight rate is the amount banks are charged to borrow or lend excess funds overnight. This rate is included in factors that influence what banks charge their customers to borrow funds.

      If the expectation of an FOMC decision is an increase in the overnight lending rate, then interest rate futures may see a decrease in price. If the expectation is to lower overnight lending rates, then interest rate futures may see an increase in price.

      Traders will want to keep an eye on the eight annual interest rate announcements from the FOMC (available on the FOMC website) and observe how the market reacts before and after the rate decisions are released. The rate decisions come with detailed explanations and projections from the FOMC. The wording of these releases is highly scrutinized by analysts and traders, and even small comments may have a large impact on the market.

      U.S. Treasury Debt Issuance

      As the U.S. Treasury issues debt in the form of notes and bonds, they increase the amount of securities available in the system and increase the amount of the debt owed by the U.S. government. This can put upward pressure on interest rates.

      One result of the great financial crisis of 2008 was the U.S. central bank, known as the Federal Reserve, bought large amounts of U.S. Treasuries and other debt instruments. Due to the size of this activity, it had the desired effect of reducing interest rates.

      U.S. Treasury interest rates are also impacted by global demand. Nearly 50% of all U.S. Treasury debt is held outside the United States. These non-U.S. participants can have a big impact on the Treasury debt pricing.

      Overall Economic Health

      Economic indicators that reflect the health of the U.S. economy have a big influence on the price of the U.S. Treasury market.

      Economic indicators that influence the slope and level of the yield curve include inflation, growth, employment, and debt as a proportion of GDP.

      Overall, the health of the economy is a primary influence on interest rates. When there is rapid growth with inflation, interest rates tend to rise and curve tends to steepen. In periods of slow growth and low inflation, rates tend to fall.

      Summary

      The U.S. interest rate market is influenced by the health of the U.S. economy and the issuance of U.S. Treasury. Risk managers and traders tasked with analyzing these markets should pay close attention to these factors.

      The interaction between the economy and interest rates is complex. Traders looking at interest rate futures have a variety of fundamental inputs that can help them formulate opinions on price.


      Test your knowledge

      Related Courses
      /content/cmegroup/en/education/courses/understanding-stir-futures/fundamental-analysis-and-interest-rate-futures
      • {{ course.name }}
      Previous Lesson
      Next Lesson
      Course Overview
      Get Completion Certificate
      Previous Lesson Next Lesson
      • YouTube
      • Twitter
      • Facebook
      • LinkedIn
      • Instagram
      • Rss

      CME Group is the world's leading and most diverse derivatives marketplace. The company is comprised of four Designated Contract Markets (DCMs). 
      Further information on each exchange's rules and product listings can be found by clicking on the links to CME, CBOT, NYMEX and COMEX.

      © 2021 CME Group Inc. All rights reserved.

      Disclaimer  |  Privacy Policy  |  Cookie Policy  |  Terms of Use  |  Data Terms of Use  |  Modern Slavery Act Transparency Statement  |  Report a Security Concern