Key Takeaways with Craig

Once again, due to travel schedules, we will be using today’s Key Takeaways section to put a spotlight on one of CME’s growing Interest Rate products; the Micro Treasury Yield futures.  These futures products allow traders to gain exposure to, by some measures, the largest debt market in the world in a straightforward, intuitive manner.  Some characteristics of these products include:

  • Offered in the 2, 5, 10 and 30-Year Tenors.
  • Based on the current “on-the-run” treasury issue which means that it will track the most recently issued instrument in each tenor.
  •  Static basis point value ($10).  Regardless of what tenor a trader desires exposure, each basis point (.01 of one percent) has a consistent value of $10. This means that, if a trader wants to trade one tenor relative to another (for example, the 2-Year vs the 10-year) they do not need to adjust for different ratios or quantities. 
  •  Quoted in Yield, not Price, allowing the trader to see exactly at what rate the instrument is currently yielding.
  • They are cash settled if held to expiration so there is not risk of an obligation to make or take delivery of the underlying security. 

Consider the following hypothetical example:

  • The Micro 2-Year Yield is trading at 4.880 and the Micro 10-Year Yield is trading at 4.293
  • Suppose a trader wanted to assume a position that would profit if the 10-Year Yield rose relative to the 2-Year (the curve moved toward a more “normal” shape where the longer dated maturities yield more than the shorter dated). 
  • They could buy the Micro 10-Year and sell the Micro 2-Year for -.587 (58.7 basis points).  Keep in mind, CME lists defined spreads on these instruments so this could be done in one transaction without assuming any leg risk. 
  • Now, assume hypothetically, the curve did become “less inverted” and the Micro 10-Year rose to 4.500 and the Micro 2-Year rose to 4.950, the trader would realize a profit of 13.7 (.587-.450) basis points.  Since each basis point is worth $10.00, this trade would profit a hypothetical $137.00.

We’ve included a graph of the Micro 2-Year versus Micro 10-Year Treasury Yield for reference.  As you can see, the inversion is currently just under 60 basis points, but has been as deep as 100 as recently as the end of July. 


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