Key Takeaways with Craig
We’re going to wrap up our series on product-focused columns today with a focus on the Micro Treasury Yield futures contracts that CME introduced last year. These products provided users with another instrument with which to gain exposure to, by some measure, the largest and most active debt market in the world, the US Treasuries. These products expanded CME’s Treasury offering from the standard Treasury products, which have averaged over 5 million contracts per day in 2022, with an intuitive, straightforward and smaller sized instrument. Some important characteristics of the new products include:
- Quoted in yield rather than price. Currently (on Friday morning, July 8th), the Micro 10-Year Yield is trading at 3.079. This represents a yield in 10-Year of 3.079%. By contrast, the traditional 10-Year Treasury future at CME is trading at a price of 117’255. While there is a yield implied by this price, the Micro yield quoted price makes it very easy for a user to understand the yield level at which they are trading.
- The Micro Treasury futures are based on the on-the-run Treasury issue. This means that the underlying cash Treasury instrument upon which the future is based is the most recently issued security in that tenor. This is the issue that is commonly quoted in the financial press and is the instrument that has a time to maturity closest to the tenor. The standard CME Treasury future is based on an underlying that is called the cheapest to deliver (“CTD”). While the math that determines which issue is the CTD is outside the scope of this column, the current CTD in the 10-Year future matures on 4/30/2029 which is slightly less than 7 years from now.
- The Micro Treasury futures have a static basis point value of $10 per basis point. Since a basis point equals .01, this means that in any of the four Micro products (2,5,10 and 30 Years) a price move from, for example, 3.079 to 3.089 represents a $10.00 change in dollar terms. This makes spreading the different Micro products against each other very straightforward.
- The Micro Treasury futures are cash settled which means a user does not have to consider the obligation to either make or take delivery of actual cash treasury instruments.
As stated above, the static basis point value of the Micro Treasury products make them an intuitive instrument with which to take a position on how different points on the yield curve might move relative to one another. Many professional fixed income traders don’t only trade one point on the yield curve, say the 10-Year, but rather trade on how the yield of the 10-Year might move relative to the yield of the 2-Year.
We used CME data to graph the settlement prices for both the Micro 2 and 10-Year futures in the upper graph below. As you can see, the difference between the two declined to about zero (the curve flattened) at about mid-month before widening out a bit. As regular readers of this column know, the curve has inverted and, if we were to draw the graph for July, we’d see the orange line above the blue line. We also show the daily net change in dollar terms (again, assuming $10 per basis point) for the month of June in the upper graph.
In the lower graph, we drew the actual spread differential between the 2 and 10 Year Micro Yields. This illustrates nicely the flattening of the yield curve as the difference between the 2 declines from about 25 basis points to about 5 basis points at the end of the month. We also indicated the net daily change in dollars of the spread itself, which was less than half of the change in the outrights during the month of June.
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