November 2021 Rates Recap

Traders turn to short-end futures as inflation expectations drive rate hike probabilities higher

In October, amid a rising probability of an FOMC rate hike by the middle of 2022 (as high as 68% per CME FedWatch) and a spike in volatility, global participants turned to the front-end of CME Group's deeply liquid interest rate product curve to manage their risk. ​​​

  • The 2Y UST CVOL Index hit a 19-month high, while 1Y and 2Y Eurodollar Mid-Curve CVOL Indexes hit multi-year highs (view latest volatility data).
  • Average daily risk transfer across short-end futures contracts (ED, SR3, SR1, FF, BSB, ZT, Z3N) hit $113M DV01 per day, +61% MoM and +33% vs. the YTD average.
  • Short-end contracts added 565K contracts of open interest, the largest MoM gain since May.

SOFR takes a giant leap forward

  • SOFR futures ADV jumped to a record 238K contracts per day in October, +75% MoM and +325% YoY.
  • Open interest surpassed 1.2M contracts, growing 40% in the last two months alone.
  • Total SOFR-linked volume averaged nearly 2M contracts per day (outright SOFR + post-June 2023 Eurodollar futures and options on them).
  • CME Cleared SOFR swaps volume surpassed $85B, a third consecutive monthly high.
  • Term SOFR licensing has grown significantly with several hundred licenses issued and counting.
Source: CME Group

Transitioning to SOFR via new reduced-tick inter-commodity spreads

As an efficient tool for RV trading and basis hedging, inter-commodity spreads (ICS) between 3M SOFR and Eurodollar futures saw record trading in October.

  • Complementing existing ICS instruments, beginning January 10*, CME Group will permit new reduced-tick SOFR-ED spreads (Globex code SED).
  • SED spreads will reduce friction for participants moving positions from Eurodollars into SOFR futures (SR3) by offering the functionality to trade at or very close to the ISDA fallback spread for 3-month USD Libor.
  • Customers will be able to trade in 0.1 bp increments around the fallback spread (e.g., -0.2, -0.1, 0, 0.1, 0.2 bps, etc.).
  • SED spreads will be available for same contract month ICS for contracts beginning with Sep 2023.
  • Each spread trade will simultaneously execute a buy (sell) in SR3 vs. a sell (buy) in Eurodollars at a spread equal to 26.16 + the traded price.
  • Substantial credits as high as 85% already exist between Eurodollar and SOFR futures. CME Clearing is planning to enhance margin efficiencies this month in applicable parts of the forward curves, especially beyond June 30, 2023.
Source: CME Group

3-Year Treasury futures see record adoption

  • Record ADV: 17.5K contracts per day in October
  • Record OI: 25.7K contracts
  • With a larger DV01 than both ZT and ZF, 3Y risk-adjusted volume reached 6% of 2Y volume in October.

Micro Treasury Yield futures participant pool expands

  • 850+ unique accounts have traded 650K contracts since launch on Aug. 16.
  • 10Y remains most active, but 2s, 5s, and 30s are gaining momentum.

Reminder: Trading at Settlement (TAS) coming to Treasury futures Nov. 15

TAS functionality allows market participants to enter a trade at a spread to the yet-to-be-determined daily settlement price calculated at 3 p.m. ET, for subsequent clearing into the existing products.

  • TAS enables clients to achieve execution at or near the settlement price, making it particularly useful when replicating an index.
  • Eligible products: ZT, ZF, ZN, TN, ZB, UB
  • Eligible contracts: Front month and calendar spreads during roll 

Considering designs for a potential 20-Year Treasury futures contract

In response to strong customer demand, CME Group has designed three prototypes for a potential new Treasury Bond futures contract to manage risk tied to the US Treasury's 20-year tenor.

CME Group has outlined these prototypes in a 10-minute webinar, and currently invites market participants to share their design preferences of this potential new product via the link below.

If the validation confirms a need for an additional futures product, it would be followed by a formal announcement of contract specifications and launch date.

IRS clearing surges in non-mandated LatAm currencies

With buy-side institutions looking for easy ways to optimize their capital due to UMR rules, more firms are turning to voluntary IRS clearing in non-mandated Latin American currencies.

CME Group's leading cleared swaps markets for Brazilian CDI IRS (BRL), Chilean Cámara IRS (CLP), and Colombian IBR OIS (COP) have seen record adoption in 2021:

  • Average daily notional volume +43% to $14B
  • Average daily trade count +34% to 373/day
  • CLP/COP average daily notional volume +61% to a record $5.2B per day
2021 YTD through Oct. 29 vs. full year 2020

Data as of October 29, 2021, unless otherwise specified
*Subject to regulatory review