Interest Rate Futures Liquidity Update – 2018

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.

Central Limit Order Book

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.

Average Central Limit Order Book Size for Treasury Futures

  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%
Bond (ZB) 154 253 377 49% 843 1,309 1,898 45%
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

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
Eurodollar Futures 14,940,838 13,096,545 14% 17,876,100 03/15/18
Eurodollar Options 44,285,596 40,449,845 9% 52,364,348 03/15/18
Treasury Futures 12,409,635 9,757,167 27% 15,284,075 11/26/18
Treasury Options 6,635,924 5,335,574 24% 10,560,506 11/21/18
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.

Daily Trading Volume

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
Eurodollar Futures 3,036,542 2,549,192 19% 11,562,175 11/09/16
Eurodollar Options 1,415,619 1,368,247 3% 4,705,224 12/15/16
Treasury Futures 4,234,461 3,327,895 27% 24,232,905 05/29/18
Treasury Options 995,847 747,825 33% 2,603,454 10/04/18
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.

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Breadth of Participation

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
 
Aggregate   1,649 1,846 2,122

Large Open Interest Holders sourced from CFTC’s Traders in Financial Futures Report, http://www.cftc.gov/Marketreports/CommitmentsofTraders/index.htm

 

*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