June Rates Recap

The Treasury's first 20-year bond since 1986 was met with healthy demand (2.53 bid-to-cover, $20B accepted, $2.1B to SOMA). Here are some key takeaways:

• The 20-year May 2040 sits almost squarely in the middle of the Classic Bond (ZB) CTD of Feb 2036 and the Ultra Bond (UB) CTD of Nov 2045, and it belongs to the ZB basket with eligibility through Mar 2025 (view current basket).
• Based on client feedback and increased trading activity coinciding with the auction, ZB and UB are key instruments meeting the hedging and risk management needs of the new 20-year point on the curve.
• The proportion of UST futures OI held in ZB+UB reached 18% on May 22, the highest level since Jan 2015.
• In the first three days after the auction, ZB accounted for 9.1% of UST futures ADV vs. 7.8% in 2019. UB accounted for 7.7% vs. 4.3% in 2019.
• Ongoing 20-year issuance will significantly increase the ZB basket in the quarters ahead.
• Current ZBM0 basket is 32 CUSIPs, $1.173T and is projected to grow to 43 CUSIPs, $1.747T with the ZBZ1 basket.
• The new 20-year cash point and its relationship to ZB and UB CTDs will provide a rich set of risk management, spread, basis, and box trading opportunities.
• For example, the Bond-Ultra (BOB) yield curve spread on CME Globex offers an efficient proxy for the May 2040-Nov 2045 cash spread.

Read: The 20-Year Bond in a Brave New World

In recent years, client-driven enhancements have brought greater total cost efficiencies (as shown by TCA tool) and risk management capabilities to users of Treasury futures, helping to drive exponential growth in buy-side participation, trading volumes, and open interest.

• 2-Year (ZT) tick cut enables finer price discovery and can improve cost to trade by up to 32%.
• Ultra 10 (TN), offering precise 10-yr Treasury exposure, grew to 1M in open interest in just four years.
• Amendments to EFRP rule 538 enable more flexibility to trade packages of swaps vs. futures (Invoice Spreads) and cash/futures (basis).
• Portfolio margining between UST futures and cleared swaps can offer margin savings of up to 81%.
• Expanded options listings to two expirations every week on Wed. and Fri. (104 expirations per year) on each tenor, and narrowed the strike increments in weeklies and front months.
• Enhanced 3-Year Note (Z3N) futures (coming July 13*) provide a new source of liquidity and opportunity to spread with cash or other UST futures.

More on 3-Year enhancements

As the €STR and SOFR discounting transitions approach in the coming months, we've created a series of webinars to answer common questions and to help market participants smoothly navigate this process.

Watch the series