May 2020 Rates Recap

Re-introducing 3-Year T-Note futures on July 13, 2020

In response to client demand for an additional tenor point on the curve, and to better serve the evolving needs of today’s Treasury market participants, CME Group will launch an enhanced 3-Year Treasury Note futures contract on July 13, 2020 (pending regulatory review and approval).

Enhancements:

1) Reduced tick size to 1/8 of 1/32 (from 1/4 of 1/32).

  • Builds on the success of the 2-Year tick cut in January 2019 which improved cost-to-trade by up to 32% and attracted more end user participation.
  • Brings greater alignment between 2s and 3s for seamless spread trading.

2) New matching algorithm of 100% FIFO for outrights (from 40% FIFO/60% Pro-Rata). Calendar spreads will remain 20% FIFO/80% Pro-Rata.

3) A more robust deliverable basket through the addition of aging 7-year notes with remaining term to maturity that ranges from 2 years, 9 months to 3 years.

  • Increases the size of the basket from roughly 8 issues/$288B to 12 issues/$400B, bringing the 3s in line with 2s and 5s.

Why now?

Much has changed since 3-Year futures launched in 2009:

  1. Most notably, futures account for a much larger share of the daily risk transfer in Treasury markets having seen exponential growth in the institutional user base, nearly 3X growth in trading volumes and 4X growth in open interest.
  2. Investors have a greater appetite for additional tenor points as evidenced by the success of the Ultra T-Bond (launched 2010) and Ultra 10-Year Note futures (launched 2016).
  3. Spread trading between Treasury futures has become more efficient with the rise of CME Globex-listed Inter-Commodity Spreads (ICS) which saw record volume in Q1.

View details


A holistic review of futures market liquidity during Q1 volatility

In a new research paper, we analyze futures market liquidity during the largest spike in volatility since the financial crisis, exploring cost-to-trade relative to the daily range and volume for a more holistic assessment.

Our findings show that economic risks caused by virus concerns reduced order book depth but relative cost to trade actually declined when compared to the expansion in daily trading ranges.

Read more

SOFR turns 2

Selected in 2017 as the ARRC's preferred alternative reference rate, SOFR debuted April 3, 2018 followed by CME SOFR futures a month later.

Here's a look at how things are progressing for the young benchmark:

Listed derivatives

  • SOFR futures are among the fastest-growing new products in CME Group’s 172-year history, with ADV exceeding 56K contracts per day during Q1 2020. 
  • 3-Month SOFR options, which launched January 6, 2020, have seen active quoting and over 500 contracts traded. 1-Month SOFR options launched May 4, 2020.

SOFR futures

Year 1 

Year 2

Global participants

 140

425

Avg. Daily Volume

 14K

43K

Avg. Daily OI

 56K

365K

Peak OI

 151K

612K

Large OI Holders

 69

161

% of SOFR traded via ICS vs. ED or FF

 4%

32%

Cleared OTC derivatives

  • Cleared SOFR swaps gained significant momentum in recent months with over $101B notional cleared at CME in Q1.
  • To date, 34 participants have cleared $156 billion notional in SOFR Swaps at CME, with notional outstanding growing to over $86B.
  • CME Group provided further details on the plan to transition price alignment and discounting for USD OTC cleared swaps to SOFR (details).

Cash markets

  • Over $225B* in SOFR- linked floating-rate securities were issued in March and April 2020, bringing total issuance to $600B* (view tenor chart).

Data as of April 30, 2020, unless otherwise specified
*Source: Bloomberg