The New Treasury Market Paradigm, published by CME Group in June 2016, compared the evolution of market liquidity in Treasury futures products and corresponding adjacent marketplaces. Among other findings, it confirmed the relative strengthening of Treasury futures liquidity in response to intensifying demand for off-balance-sheet means of holding Treasury note and bond exposures.
The trends it identified have gained significant momentum in the 2.5 years since the paper was published.
The quality of the central limit order book (CLOB), the fundamental signifier of futures market liquidity, affirms that the Treasury futures liquidity pool has deepened and grown more resilient in recent years. For all Treasury futures products, for example, best bid/offered price spreads matched corresponding contract minimum price increments throughout more than 99% of each trading day.
Significantly, for each Treasury futures product, CLOB depth has improved at both the best bid/offered price level, and at the top three bid/offered price levels in aggregate.
|Avg Book Size at Best Bid/Offer Level||Avg Book Size at Best 3 Bid/Offer Levels|
|2016||2017||2018||% Growth vs. 2017||2016||2017||2018||% Growth vs. 2017|
|2-Yr Note (ZT)||3,854||38,852||99,471||156%||13,760||74,152||131,254||77%|
|5-Yr Note (ZF)||596||866||1,319||52%||3,172||4,465||6,632||49%|
|10-Yr Note (ZN)||1,166||1,649||2,507||52%||6,360||8,324||12,322||48%|
|Ultra 10-Yr Note (TN)||96||138||246||78%||538||847||1,388||64%|
|Ultra Bond (UB)||50||70||110||57%||309||414||580||40%|
Outright front-month only, measured during regular trading hours (7:00 am to 4:00pm, CT)
Other liquidity metrics examined in The New Treasury Market Paradigm have also continued to improve since mid-2016. Liquidity can be defined broadly as a market participant’s ability to convert assets into cash or to enter/exit a position; and is therefore proportional to indicators such as open interest, average daily trading volume and breadth of market participation. The following summarizes recent milestones in those three key liquidity measures.
Open interest (OI) reliably gauges outstanding positions. From 2015 to 2016, average daily open interest (ADOI) in all CME Group interest rate products grew 15%. In 2017, ADOI grew another 17%. In 2018, ADOI increased 14%, setting new single-day records in every product group along the way (summarized in the following table and illustrated in the following four charts)
|Product Group||2018 ADOI||2017 ADOI||% Growth vs 2017||All-time record||Date of record|
|Interest Rate F&O||80,351,780||70,232,368||14%||90,992,998||03/15/18|
|Fed Fund Futures||1,984,519||1,524,868||30%||2,501,023||05/01/18|
Aggregate Treasury futures OI set numerous single-day records, reaching a high of 15.2 million contracts on November 26. This was fueled by single-day records in every Treasury futures tenure, and outsized growth in Ultra 10-Year Note futures. Single-day open interest records were also set in 10-Year Note options, 5-Year Note options, 2-Year Note options, “Classic” T-Bond options, Weekly Treasury options and Eurodollar options.
In 2018, average daily volume (ADV) grew 22% compared to 2017’s record levels, while new single-day records were reached in Eurodollar futures and options, Treasury futures and options and Fed Fund futures.
|Product Group||2018 ADV||2017 ADV||% Growth vs 2017||Single-Day Volume Record (contracts)||Date of record|
|Interest Rate F&O||9,951,285||8,189,337||22%||39,651,902||05/29/18|
|Fed Fund Futures||259,273||191,148||36%||1,188,577||05/29/18|
2018 Treasury futures ADV of 4.2 million contracts, signifies over $474 billion notional face value per day. That’s massive, not just in absolute terms, but also in comparison to the adjacent cash government securities market. The notional value of futures trading volume reached 116% of trading volume in cash Treasury notes and bonds (as measured on a 52-week moving average as of December 19, 2018), up from 94% in 2017, 80% in 2016 and 75% in 2015.
In December 2018, the CFTC published a new study* of U.S. Treasury market liquidity which further highlights the relative strength of Treasury futures market liquidity as measured by DV01 risk transfer. Among the study’s findings, the 10-Year Note futures contract has the largest share of risk transfer (DV01) among the instruments studied, and its share grows during times of higher volatility. Additionally, during non-U.S. hours, Treasury futures' share of volume increases relative to cash instruments.
Interest Rate futures markets have achieved increasingly broad participation by an increasingly diverse user base, as evidenced by the number of large open interest holders (LOIH) tallied in the CFTC weekly Commitment of Traders report. Aggregate LOIH, a fair proxy for overall market participation among firms holding significant positions, reached a record high of 2,199 OI holders on November 20, 2018. In 2018, new highs were also reached in Treasury futures (1,622 on October 23), Fed Fund futures (175 on February 27), 2-Year Note futures (362 on November 20), 5-Year Note futures (367 on November 20), 10-Year Note futures (471 on November 6), Ultra 10-Year Note futures (115 on November 20), Bond futures (204 on October 23) and Ultra-Bond futures (133 on November 13).
|Reportable Position Size in contracts ($ notional)||2016 Avg Weekly LOIH||2017 Avg Weekly LOIH||2018 Avg Weekly LOIH|
|2-Year Note (ZT)||1000 ($200M)||245||275||339|
|5-Year Note (ZF)||2000 ($200M)||288||306||347|
|10-Year Note (ZN)||2000 ($200M)||357||392||441|
|Ultra 10-Year Note (TN)||2000 ($200M)||26||65||101|
|Bond (ZB)||1500 ($150M)||149||160||183|
|Ultra Bond (UB)||1500 ($150M)||98||110||126|
|Eurodollar (GE)||3000 ($3B)||276||306||302|
|Fed Funds (ZQ)||600 ($3B)||129||151||156|
|3M SOFR (SR3)||25 ($25M)||--||--||25|
|1M SOFR (SR1)||25 ($125M)||--||--||26|
|10-Year MAC Swap (N1U)||25 ($2.5M)||44||48||43|
|5-Year MAC Swap (F1U)||25 ($2.5M)||36||33||33|
*Baker, McPhail, and Tuckman (2018), “The Liquidity Hierarchy in the U.S. Treasury Market: Summary Statistics from CBOT Futures and TRACE Bond Data,” Office of the Chief Economist, Commodity Futures Trading Commission."
Read our original whitepaper, The New Treasury Market Paradigm