Similar to SR3, TBF3 futures have a contract size of $25 per basis point and have contract critical dates organized around the IMM calendar. Predefined SR3/TBF3 spreads with 1:1 spread ratios are tradable on CME Globex. Implied pricing links the liquidity in the SR3/TBF3 ICS to liquidity in the outright markets for the corresponding SR3 futures and TBF3 futures. 

Initially, TBF3 futures have been listed for trading in each of the nearest four March quarterly delivery months (March, June, September, and December), from December 2023 through September 2024, inclusive, and nearest two serial months, October 2023 and November 2023, inclusive. SR3/TBF3 ICS are available for trading for each of these six months. 

The spread price scheme is “SR3 contract price minus TBF3 contract price”. It can be noted that the SR3 contract price is based on a money market yield while the TBF3 contract price is based on a discount yield. Discount yield will typically be lower than the equivalent money market yield, and as a result it is not unexpected to observe the price of the ICS as a negative number. 

The “contract month” convention for naming TBF3 futures mirrors the established convention for SR3 futures in the sense that the three-month period of interest rate exposure is essentially identical for any TBF3 and SR3 pair with identical contract months. 

Below we show this construct for the December 2023 contracts: 

Dec 2023 SR3/TBF3 spread (i.e., the price spread between SR3Z3 minus TBF3Z3) - 

TBF3Z3’s final settlement price will be determined by the high discount rate of the 13-week Treasury bill auction on Monday, December 18, 2023. The underlying 13-week Treasury bill settles on the third Thursday of contract month, December 21, 2023, and matures three months later, on Thursday, March 21, 2024. This is a forward-looking rate that covers three months of rate exposure. 

SR3Z3’s final settlement price will be determined by daily compounding SOFR rates, during the interval from (and including) Wednesday, December 20, 2023, through (and not including) Wednesday, March 20, 2024. This aligns closely with the three months of exposure covered by the 13-Week U.S. Treasury Bill futures. 

The hypothetical December 2023 SR3/TBF3 spread is shown below.

The futures on both legs are referred to as “December” contracts and their respective intervals of interest rate exposure almost perfectly overlap. 

The crucial difference is that the SR3 contract remains alive and tradable for three months after the TBF3 contract has expired. Anyone holding a nearby SR3/TBF3 spread position must decide how to monitor and manage the SR3 leg. Inaction at the point of TBF3 expiry will result in an outright position in an SR3 contract that will accrue to expiry three months later. Holders of SR3/TBF3 ICS positions are encouraged to consider rolling positions prior to the expiry of the TBF3 leg or alternatively closing the outright risk of the SR3 leg after the expiry of the TBF3.

SOFR futures are well-suited for mitigating risk within cash T-bill portfolios, as they share a similar characteristic of risk reduction with the passage of time. Each day that elapses provides additional clarity on where the SOFR futures hedge will eventually settle, thanks to the release of more known fixings. Simultaneously, the remaining duration of cash T-bills steadily diminishes, aligning the risk periods of both cash and futures positions. 

Those who hedge cash T-bills with SOFR futures should be mindful of an inherent asset swap risk within their positions. Notably, T-bill yields respond to external market conditions, such as economic data or changes in T-bill supply, differently in terms of both speed and magnitude when compared to SOFR rates. 

To mitigate the asset swap risk present in their position, a SR3/TBF3 spread can be deployed to hedge the portfolio. 

Consider a scenario in which a portfolio holds a long position in cash T-bills and a short position in SOFR futures, thus exposed to asset swap risk. Such a portfolio may opt for a short U.S. T-Bill futures vs. long SOFR futures spread trade to counteract this risk. This trade operates as an overlay to the underlying portfolio, effectively offsetting the short SOFR futures risk in the original portfolio while introducing a short U.S. T-Bill futures risk. 

It's important to note that U.S. T-Bill futures rely on a forward-looking single point-in-time rate determined at auction, with the contract expiring upon the publication of auction results. Consequently, customers employing U.S. T-Bill futures to hedge cash T-bills must roll over their hedge at each expiration to maintain sensitivity to expected T-bill yields. Those using U.S. T-Bill futures vs. SOFR futures to neutralize asset swap risk similarly need to roll the intercommodity spread trade forward at each expiry. 

Consider the following hypothetical portfolio: 

Long $100,000 DV01 Treasury bills with time to maturity between one month and six months.

Short $100,000 DV01 SOFR futures across SR1 and SR3 in multiple expiries to most accurately offset the interest rate risk of the Treasury bills in the portfolio. 

Should an unforeseen surge in the supply of bills or a shortage of demand occur, a portfolio of this nature could face potential losses. To mitigate this risk effectively, a trader may choose to hedge their position by implementing a spread strategy involving a SR3/TBF3 spread. 

Each futures contract is characterized by its association with the IMM index. In this particular scenario, both SR3 and TBF3 contracts are standardized at $25 per contract per basis point. To effectively hedge the initial $100,000 portfolio risk, the recommended overlay would encompass a strategic spread position of 4,000 contracts. 

Long 4000 December SR3 futures @ 94.55 (yield = 5.45) 

Short 4000 December TBF3 futures @ 94.64 (yield = 5.36) 

Consider the scenario where U.S. T-bill yields experience an average increase of 5 basis points, due to heightened supply. Consequently, this uptick in yields leads to a decline in the prices of U.S. T-Bill futures. Simultaneously, the SOFR yield curve also undergoes an upward shift, with an average increase of 2 basis points. 

Our portfolio is now as follows: 

Long $100,000 DV01 Treasury bills down by average of 5bp 
Short $100,000 DV01 SOFR futures down by average of 2bp 
This original part of the portfolio has lost $300,000

And: 

Long 4,000 December SR3 futures @ 94.53 (yield = 5.47)

Short 4,000 December TBF3 futures @ 94.59 (yield = 5.41) 

The price of the futures spread transitions from -9 basis points to -6 basis points, indicating a 3 basis point increase. With a quantity of 4,000 contracts in play, this shift translates into a profit of $300,000 (3 basis points x 4,000 contracts x $25 per contract), effectively offsetting the loss incurred in the initial portfolio. 

Exhibit one depicts SR3/TBF3 spreads implied by actual SR3 final settlement prices and hypothetical TBF3 final settlement prices between December 2018 and May 2023, inclusive.

13-Week U.S. Treasury Bill futures shall trade on and according to the rules of CME Group, pending certification of contract terms with the CFTC and completion of all regulatory review periods. All times of day are Central Time (CT) unless otherwise noted.

Three-Month SOFR futures shall trade on and according to the rules of CME Group, pending certification of contract terms with the CFTC and completion of all regulatory review periods. All times of day are Central Time (“CT”) unless otherwise noted.

Neither futures trading nor swaps trading are suitable for all investors, and each involves the risk of loss. Swaps trading should only be undertaken by investors who are Eligible Contract Participants (ECPs) within the meaning of Section 1a(18) of the Commodity Exchange Act. Futures and swaps each are leveraged investments and, because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for either a futures or swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles and only a portion of those funds should be devoted to any one trade because traders cannot expect to profit on every trade.

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