The 20-Year futures contract will physically deliver a bond with remaining term to maturity of at least 19 years and 2 months and less than 19 years and 11 months. The new 20-Year futures will have a basket of six securities, including three recently auctioned 20-year bonds and three aging 30-year bonds.

Source: CME Group

The 20-Year futures contract allows market participants to trade at the 20-year tenor point, providing a more accurate representation of 20-year risk. Furthermore, it affords greater trading opportunities with CME Group’s existing Treasury futures, including the 10-Year, Treasury Bond, and Ultra Bond contracts. All in all, 20-Year futures are a welcome addition to this suite of successful products.

The addition of a 20-Year futures contract will have a unique impact on the deliverable basket. Treasury futures contracts tend to be fulfilled by delivery of the corresponding cheapest-to-deliver (CTD) note or bond issue, therefore it is instructive to consider the supply of the futures contract’s CTD issue, rather than the face value of the entire deliverable supply.

With market yields well under 6 percent (the yield level that the Exchange uses to standardize conversion factors for determination of Treasury futures delivery invoice prices), the CTD issue for an expiring 20-Year contract is likely to be the shortest duration bond in the basket. The CTD issue also typically is the bond with the lowest cash flow cost, making it the most attractive security for the holder of a short position in the futures contract.

When a new bond is issued, it is deemed the on-the-run (OTR) security and it replaces the current OTR, which then becomes the “old” security. The 20-year bond is issued on a quarterly basis, meaning the triple-old 20-year bond was the OTR bond when it was first issued nine months prior.

Effective May 9, 2022 and beginning with the September 2022 contract of the 20-Year futures, the OTR security will no longer be included and aging 30-year U.S. Treasury Bonds will be included in the deliverable basket. These changes to the 20-Year futures contract will ensure an effective delivery basket for a variety of interest rate environments and bond issuance scenarios.

A hypothetical delivery basket for the September 2022 contract is provided below. In this instance, the CTD is the oldest aging 30-year bond in the basket.

*as of April 28, 2022;
**will be auctioned May 18, 2022

Thus far, eight 20-year bonds have been issued by the Treasury, with an average original issuance size of nearly $25 billion; however, taking reissuances into account, the adjusted issuance size averages to $67 billion.

The CTD issue for the September 2022 20-year has an issuance size of $42 billion. The 20-year will typically have a larger issuance because, along with the 10- and 30-year, the 20-year bond is auctioned three times, providing an opportunity for the issuance size to expand.

CME Group’s Treasury Analytics tool provides an interactive way to find the CTD for specific contract months, as well as to see a breakdown of the deliverable baskets for each issue and important values associated with inter-commodity spread ratios, making the tool a one-stop-shop for market participants looking to trade both futures and cash Treasuries. 

Now that traders can manage risk at the 20-year tenor point on the yield curve, they might also enjoy improved Treasury yield curve trading, greater cash-futures spread trading opportunities, and margin offsets. 

The introduction of 20-Year futures provides greater spread-trading opportunities for customers. Along with the initial launch of the futures contract, there are a full suite of spreads and combinations against established members of the Treasury futures suite available on the CME Globex electronic trading platform, including the inter-commodity spreads in the table below.

*Leg quantity and price ratios are subject to change

20-Year futures are proximate to not just the Treasury Bond, but to the Ultra Bond as well, making the new contract an appropriate hedge and proxy for long-end Treasury yield exposure. Furthermore, customers can take advantage of cash spreading opportunities at the 20-year and 30-year points using the BrokerTec platform and BrokerTec RV Curve. These enhanced spread trading opportunities will allow for greater price discovery between both the futures and cash markets and expands market participants’ ability to manage basis risk.

Lastly, there will be immediate cash efficiencies offered by margin offsets to position accounts that contain interest rate products. CME Group has evaluated the risk profile interactions between the 20-Year contract and Treasury futures, short-term interest rate, and deliverable swap futures complexes, and will apply the appropriate levels of margin offsets where applicable. 20-Year futures will be made available for portfolio margining in order to capture the potential capital efficiencies afforded by offsetting the risk between the 20-Year futures and cleared OTC interest rate swaps.

Creation and analysis of a price history of 20-Year futures showed its synthetic price tracks nicely with both 10-Year Note futures and Treasury Bond futures, making it an appropriate hedge and additional tool to trade the yield curve and helping to manage risk. This synthetic price history can be downloaded here.

For more information about 20-Year Bond futures and how to trade them, visit the CME Group website.

1. https://home.treasury.gov/news/press-releases/sm878