Interest Rate Futures Liquidity Update – H1 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 24 months 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 percent 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 H1 % Growth vs. 2017 2016 2017 2018 H1 % Growth vs. 2017
2-Yr Note (ZT) 3,854 38,852 104,384 169% 13,760 74,152 147,120 98%
5-Yr Note (ZF) 596 866 1,110 28% 3,172 4,465 5,630 26%
10-Yr Note (ZN) 1,166 1,649 2,327 41% 6,360 8,324 11,490 38%
Ultra 10-Yr Note (TN) 96 138 209 52% 538 847 1,157 37%
Bond (ZB) 154 253 288 14% 843 1,309 1,545 18%
Ultra Bond (UB) 50 70 88 25% 309 414 473 14%

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 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 3 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%. Through the first half of the year in 2018, ADOI has 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 H1 ADOI 2017 ADOI % Growth vs 2017 All-time record Date of record
Interest Rate F&O 80,040,286 70,232,368 14% 90,992,998 03/15/2018
Eurodollar Futures 15,806,972 13,096,545 21% 17,884,540 03/15/2018
Eurodollar Options 44,142,029 40,449,845 9% 52,364,348 03/15/2018
Treasury Futures 11,429,564 9,757,167 17% 13,083,375 05/24/2018
Treasury Options 6,547,871 5,335,574 23% 9,835,910 02/22/2018
Fed Fund Futures 2,054,493 1,524,868 35% 2,501,023 05/01/2018

Aggregate Treasury futures OI set numerous single-day records, fueled by growth and single-day records in “Classic” 10-Year T-Note futures, 5-Year T-Note futures, 2-Year T-Note futures, “Ultra” 10-Year T-Note futures and Ultra T-Bond futures. Single-day open interest records were also set in 10-Year note options, 5-Year note options, Eurodollar Mid-Curve options, and Weekly Treasury options.

Daily Trading Volume

Following a record 2016, various interest rate products and product sectors hit new highs in annual average daily trading volume (ADV) in 2017. In H1 2018, ADV grew 29% 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 H1 ADV 2017 ADV % Growth vs 2017 Single-Day Volume Record (contracts) Date of record
Interest Rate F&O 10,541,000 8,189,337 29% 39,651,902 05/29/2018
Eurodollar Futures 3,390,824 2,549,192 33% 9,249,757 05/29/2018
Eurodollar Options 1,598,320 1,368,247 17% 3,821,681 02/15/2018
Treasury Futures 4,285,440 3,327,895 29% 24,232,905 05/29/2018
Treasury Options 982,178 747,825 31% 2,462,348 05/29/2018
Fed Fund Futures 279,723 191,148 46% 1,188,577 05/29/2018

H1 2018 Treasury futures ADV of 4.3 million contracts, signifies over $484 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.  For the first time ever, the notional value of futures trading volume surpassed 100% of trading volume in cash Treasury notes and bonds (as measured on a 52-week moving average), up from 94% in 2017, 80% in 2016 and 75% in 2015.

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 2,138 OI holders on May 15, 2018. In H1 2018, new highs were also reached in Treasury futures (1,577 on 5/22), Fed Fund futures (175 on 2/27), 2-Year Note futures (348 on 3/27), 5-Year Note futures (363 on 5/22), 10-Year Note futures (458 on 6/5), Ultra 10-Year Note futures (101 on 6/26), Bond futures (194 on 5/22) and Ultra-Bond futures (132 on 5/29).

  Reportable Position Size in contracts ($ notional) 2017 Avg Weekly LOIH LOIH on 26 Jun 2018
10-Year Note (ZN) 2000 ($200M) 392 436
5-Year Note (ZF) 2000 ($200M) 306 345
2-Year Note (ZT) 1000 ($200M) 275 335
Bond (ZB) 1500 ($150M) 160 175
Ultra Bond (UB) 2000 ($200M) 110 131
Ultra 10-Year Note (TN) 1500 ($150M) 65 101
       
Eurodollar (ED) 850 ($850M) 306 283
Fed Funds 600 ($3B) 151 142
       
10-Year MAC Swap (N1U)   48 45
5-Year MAC Swap (F1U)   33 33
       
Aggregate   1,846 2,026

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

Read our original whitepaper, The New Treasury Market Paradigm, at cmegroup.com/treasuryparadigm