The basics of U.S. Treasury futures

  • 18 Apr 2023
  • By CME Group

Introduction

CBOT U.S. Treasury futures are standardized contracts for the purchase and sale of U.S. government notes or bonds for future delivery. The U.S. government bond market offers the greatest liquidity, security (in terms of credit worthiness), and diversity among the government bond markets across the globe. The U.S. government borrows through the U.S. bond market to finance its maturing debt and its expenditures. As of December 2022, there was $24 trillion of U.S. government bonds and notes outstanding as marketable debt.

The U.S. government borrows money primarily by issuing bonds and notes for a fixed term, e.g., 2-year, 5-year, 10-year, and 30-year terms at fixed interest rates determined by the prevailing interest rates in the marketplace at the time of issuance of the bonds. Strictly speaking, U.S. Treasury bonds have original maturities of greater than 10 years at time of issuance, and U.S. Treasury notes have maturities ranging of 2, 3, 5, 7 and 10 years. For the purpose of this note, U.S. Treasury bonds and notes are applicable for general references to the U.S. bond market or U.S. bonds unless described otherwise.

U.S. Treasury bonds trade around the clock leading to constant price fluctuations. In general, bond prices move in inverse proportion to interest rates or yields. In a rising rate environment, bondholders will witness their principal value erode; in a declining rate environment, the market value of their bonds will increase.

IF Yields Rise ▲ THEN Prices Fall ▼
IF Yields Fall ▼ THEN Prices Rise ▲

U.S. Treasury futures and options contracts are available for each of the U.S. Treasury benchmark tenors: 2-year, 5-year, 10-year, and 30-year. Additionally, CME Group offers Ultra 10-Year Note and Ultra T-Bond futures which offer greater precision for trading the 10-year and 30-year maturity points on the yield curve, respectively. Filling out the curve further, 3-Year Note futures (reintroduced in 2020) bring finer hedging granularity to the front of the curve, while 20-Year Bond futures (launched in 2022) provide a precise instrument for hedging 20-Year bond exposure.

Each of the bond and note futures contracts has an associated delivery bond basket that defines the range of bonds by maturity that can be delivered by the seller to the buyer in the delivery month. For example, the 5-year contract delivers into any U.S. government fixed coupon bond that has a remaining maturity of longer than 4 years and 2 months and an original maturity of no more than 5 years and 3 months. The delivery mechanism ensures the integrity of futures prices by ensuring that they are very closely tied to the prices of U.S. government bonds and their yields (interest rates). In practice, most participants trade U.S. Treasury futures contracts with the intent of either closing out the futures position or rolling them into longer expiry futures contracts. U.S. Treasury futures are listed on the March, June, September, and December quarterly cycles. 

Table 1: CBOT U.S. Treasury futures contract details

 

2-Year T-Note

3-Year T-Note

5-Year T-Note

10-Year T-Note

Ultra 10-Year T-Note

T-Bond

20-Year T-Bond

Ultra T-Bond

Face Amount

$200,000

$200,000

$100,000

$100,000

$100,000

$100,000

$100,000

$100,000

Deliverable Maturities

1 3/4 to 2 years

2 9/12 to 3 years

4 1/6 to 5 1/4 years

6 1/2 to 8 years

9 5/12 to 10 Years

15 years up to 25 years

19 2/12 to 19 11/12 years

25 years to 30 years

Contract Months

March quarterly cycle: March, June, September, and December

Trading Hours

Electronic: 5:00 pm - 4:00 pm, Sunday - Friday (Central Time)

Last Trading & Delivery Day

Last business day of contract month; delivery may occur on any day of contract month up to and including last business day of month

Day prior to last seven (7) business days of contract month; delivery may occur on any day of contract month up to and including last business day of month

Minimum Tick

In percent of par to one-eighth of 1/32nd of 1% of par

In percent of par to one-eighth of 1/32nd of 1% of par

In percent of par to one quarter of 1/32nd of 1% of par

In percent of par to one-half of 1/32nd of 1% of par

In percent of par to one-half of 1/32nd of 1% of par

In percent of par to 1/32nd of 1% of par

In percent of par to 1/32nd of 1% of par

In percent of par to 1/32nd of 1% of par

Minimum Tick Value

$7.8125

$7.8125

$7.8125

$15.625

$15.625

$31.25

$31.25

$31.25

CME Globex

ZT

Z3N

ZF

ZN

TN

ZB

TWE

UB

Bloomberg

TU

3Y

FV

TY

UXY

US

TWE

WN

Each U.S. Treasury futures contract has a face value at maturity of $100,000 with the exceptions of 2-year and 3-year U.S. Treasury futures contracts, which have face value at maturity of $200,000. Prices are quoted in points per $2,000 for the 2-year and 3-year contract and points per $1,000 for all other U.S. Treasury futures. The fractional points are expressed in 1/32nd in line with the convention in U.S. government bond market. The minimum tick size for the 30-year (T-Bond), 20-Year, and Ultra T-Bond contracts is 1/32nd of one point ($31.25), 10-Year and Ultra 10-Year is half of 1/32nd of one point ($15.625), 5-Year is one-quarter of 1/32nd of one point ($7.8125), and 2-Year and 3-Year is one-eighth of 1/32nd of one point ($7.8125).

A multitude of factors contribute to the broad participation, as well as the deep and consistent liquidity in U.S. Treasury futures. These factors include standardization, neutrality, and safety of CME Clearing, which also afford lower margin requirements in futures. Initial margin requirements in futures are established by prudent risk management and the self-funding nature of futures. Additionally, with available margin offsets versus other interest rate futures and options positions, cross margining versus CME Cleared interest rate swaps via portfolio margining, and cross margining with FICC cash U.S. Treasury positions, users of U.S. Treasury futures can significantly optimize their margin requirements. This capital efficiency coupled with the off-balance sheet nature of U.S. Treasury futures drives broad participation in these markets. U.S. Treasury futures serve a diverse mix of customer types including asset managers, banks, corporate treasurers, hedge funds, insurance companies, mortgage bankers, pension funds, primary dealers, and proprietary traders. The vast hedging and speculative activity in U.S. Treasury futures create nearly constant price fluctuations providing excellent opportunities for individual traders in addition to institutional trading accounts. In addition, CME Group has a vast interest rate product distribution through our network of global clearing members and CME Globex, the world’s premier electronic matching engine. CME Globex promotes orderly markets through its robust credit and market risk control measures.

Trading examples

Historically, when the economy strengthens, interest rates are likely to rise for several reasons, such as:

  • Increased demand for loans
  • Asset allocation out of bonds (typically considered a safe asset class) into stocks (typically considered a risky asset class)
  • Increased likelihood of interest rate increases by the Federal Reserve Board

When interest rates rise, U.S. Treasury futures prices fall.

Similarly, when the economy weakens, interest rates are likely to fall for reasons such as:

  • Decreased demand for loans
  • Asset allocation out of stocks into bonds
  • Increased likelihood of interest rate cuts by the Federal Reserve Board

The U.S. economy is more like a cruise liner than a speed boat in that it often stays on a path of strengthening or weakening for several months to a few years. This causes broader moves in interest rates that are spread over considerable time periods as opposed to very short periods. Nevertheless, U.S. Treasury futures produce short term trading opportunities, as demonstrated in the following examples.

Example 1: A trader believes that the U.S. economy is strengthening, and intermediate U.S. Treasury yields (5-year and 10-year) will increase.This trader sells 10 contracts of March 2014 5-Year T-Note futures at 120 25/32.

The trader’s view proves correct. The economic numbers continue to show that the U.S. economy is strengthening. 5-year Treasury yields rise, and the March 2014 5-Year T-Note futures price declines. The trader buys back the 10 March 2014 5-Year T-Note futures contracts at 120 03/32.Profit on this example trade = 10 * (120 25/32 – 120 03/32) * $1000 = $6,875

(Profit or Loss = Number of contracts* Change in price * $1000)

The profit calculation in this example can also be expressed in terms of minimum ticks or simply referred to as ticks. The tick size for 5-year contract is 1/4 of 1/32nd of 1 point.

The dollar value for minimum tick of the 5-Year contract is $7.8125.

Number of ticks made on the trade = (25/32 – 3/32) * 4 = 88 Ticks

Profit on this example trade = 10 Contracts * 88 Ticks * $7.8125 = $6,875

Example 2: The monthly U.S. non-farm payroll number on the first Friday of a month comes out significantly weaker than expected. This indicates a surprisingly weakening economy. As a result, Treasury yields decline, and U.S. Treasury futures prices rise. A trader notices that the March 2014 10-Year T-Note futures have responded to the report by posting modest rally from 125 05/32 to only 125 15/32. He believes that the weakness in the number was a significant surprise and more participants will soon need to buy notes.

This trader buys 10 contracts of March 2014 10-Year T-Note futures at 125 15.5/32.

The trader’s view proves correct. Intermediate Treasury yields continue to fall, and the 10-Year T-Note futures price rises further. An hour later the trader sells back the 10-Year T-Note futures price rises further. An hour later the trader sells back the 10 March 2014 10-Year T-Note futures contracts at 125 23/32.

Profit on this example trade = 10 * (125 23/32 – 125 15.5/32) * $1000 = $2,344 (rounded to nearest dollar)

Like the previous example, let us recalculate the profit in this example using ticks. The tick size for 10-Year contract is 1/2 of 1/32nd of 1 point. The dollar value for minimum tick of the 10-Year contract is $15.625.

Number of ticks made on the trade = (23/32 – 15.5/32) * 2 = 15 Ticks

Profit on this example trade = 10 Contracts * 15 Ticks * $15.625 = $2,344 (rounded to nearest dollar)

Conclusion

The U.S. Treasury futures complex at CME Group consists of liquid and easy to access markets that offer a wide variety of strategies for a broad and diverse mix of customer types needing to hedge exposures to interest rates and traders seeking to assume risk to take advantage of anticipated changes in interest rates. For additional details on Treasury futures and trading strategies please visit our Treasury futures and options products page.

To gain a more in-depth understanding of Treasury futures, read our whitepaper Understanding Treasury Futures.

Glossary

Average Daily Volume (ADV): The total number of contracts traded over a given period divided by the number of trading days during that period. Commonly used by CME Group to describe the trading activity in a contract.

Coupon:  Interest payment of a security fixed at issuance, usually expressed in annual terms. For example, a 2% coupon bond pays 2% interest annually. Treasuries are quoted in coupon yield expressed in annual terms, but pay interest twice per year.

CME Globex: CME Globex is the premier electronic trading system providing global connectivity to the broadest array of futures and options across all asset classes. CME Group technology facilitates electronic trading, providing users across the globe with virtually 24-hour access to global markets.

Delivery Basket: A basket of contract grade securities that are eligible for physical delivery in an expiring futures contract.

Face Amount: Also known as face value, par value, or par. The dollar amount to be repaid to the holder of the security at maturity. For example, a $1,000 face value, 2% 10-Year Note, will pay 1% twice a year for 10 years and at the last payment return to the holder $1,000.

Federal Reserve Board: The Board of Governors of the Federal Reserve System is the governing body of the U.S. Federal Reserve System. Among other things, the Board oversees the 12 Federal Reserve Banks and conducts monetary policy through the Federal Open Market Committee (FOMC).

Maturity: The date on which the face amount of a bond is repaid to bondholders.

Open Interest (OI): Used by exchanges to describe open positions at the end of a daily trading session.

Treasury Bills: Treasuries with original maturity of less than one year.

Treasury Notes: Treasuries with original maturities of  two years, but no more than 10 years.

Treasury Bonds: Treasuries with original maturities of more than 20 years.

U.S. Treasuries: Or “Treasuries”; debt issued by the U.S. Federal Government offered in multiple maturity dates, auctioned on a regular auction schedule. Treasuries are made up of T-Bills, T-Notes, T-Bonds, and TIPS.

Yield-to-Maturity (YTM): An estimate of the yield that a bondholder will receive if the bond is held to maturity and all coupons are reinvested at the YTM. The YTM is the discount rate that equates a bond’s price with the present value of its coupon payments and face value.

Yield Curve: A curve that plots the yield-to-maturity of fixed income securities with equal credit quality against time to maturity.

About CME Group

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