Key Takeaways with Craig

US Equity prices fell sharply and Treasury Yields spiked this morning after the CPI release reflected higher than expected domestic inflation. After a bit of a late day rally, stock prices closed off the day’s low but the Nasdaq was down by over 1.5% and the Russell 2000 was down by nearly 4%.  US Treasury yields closed near the day’s highs with CME’s 2-Year Treasury Yield future up by about 17.5 basis points and the 10-Year up by about 14.5 bps. 

CME’s Fed Funds futures also reacted to the CPI print as the FedWatch tool now reflects only a 33% chance of a cut to the Fed Funds target rate, down from 52%, by the May meeting. 

Coincidentally, on a day during which the US 10-Year Treasury note traded in a nearly 15 basis point range, using CME’s Yield futures as a proxy, CME announced that it would be launching two new futures products that will augment its suite of US Treasury futures.  As you can read more about here, CME announced that it would be listing  Micro Ultra 10-Year U.S. Treasury Note and Micro Ultra U.S. Treasury Bond futures contracts. These new Treasury futures will closely replicate the current US Treasury futures listed at CME, but will be 1/10 the size and will be cash settled rather than deliverable at expiration. 

With the addition of these new products, CME will now offer the following futures products on US Treasury debt:

  • Treasury futures from 2-Year Notes through the Ultra T-Bond that are quoted in price, deliverable and have notional values of $200,000 (2 and 3-Year Notes) and $100,000 (5-Year through Ultra T-Bond).
  • Micro Treasury futures on Ultra 10-Year and Ultra T-Bond that are quoted in price, cash settled to their underlying futures and have notional values of $10,000. 
  • US Treasury Yield futures on 2, 5, 10 and 30-Year Treasuries that are quoted in Yield, cash settled to the on-the-run yield and have a static basis point value of $10.00. 

To put this in perspective, at around 10:00 AM Central time this morning, the 10-Year Treasury Yield future was trading at 4.281, up 11.1 basis points from yesterday’s close.  Because 1 basis point is worth  $10.00, this is represents a $111.00 move in dollar terms.

Around the same time, the Ultra 10-Year Treasury Note was trading at 113 24/32 up 1 1/32 from yesterday’s close.  Since every full point in the futures contract is worth $1,000, this represents $1,031.25 in dollar terms.

If we assume that, hypothetically, the price of the Micro Ultra 10-Year would have reflected the price of the Ultra 10-Year today (though this is not guaranteed), the 1 1/32 move in the Micro Ultra 10-Year would have represented $103.13 in dollar terms. 

Getting back to today’s markets, and sticking with the Treasury theme, the impact on implied volatility in the Treasury options markets was rather muted today, as reflected in the relatively small upside move in CVOL.  However, the skew and convexity, which are represented in the two graphs below, saw a more significant reaction.  As you can see, the Calls were bid over the Puts, as reflected in the top graph below that illustrates the skew in yield terms.  Convexity, represented in the lower graph, is trading at 3-month highs.  Remember, this is a measure of how high the volatility in the out of the money options is relative to the at the money.  The higher the convexity, the more value traders are putting on options that are out of the money, or, in other words, the market is placing a premium on the “wings”.  

Today's Future Price Action

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