Three Interest Rate Themes in 2025

The shape of the yield curve is a fundamental indicator of market expectations and economic conditions. In 2025, key factors to watch include changes in inflation that drive FOMC policy, and the debt ceiling discussions. Additionally, continued quantitative tightening (QT) by the Fed as it reduces its SOMA holdings, and changes to debt issuance by the U.S. Treasury as it assesses changes in fiscal policies and aims to increase the average duration of the debt, are crucial. 

TreasuryWatch provides investors with a complete and interactive interface to see and monitor much of what can impact the curve.

Traders can adeptly position for curve trades using the rich Treasury inter-commodity spreads (ICS) on Treasury futures to position for and easily adjust to changes in the Treasury curve. A comprehensive listing of ICS across the Treasury curve enables traders to execute nuanced curve trades. In addition, ICS on the Treasury curve can potentially provide margin savings.

We recently launched a variety of fixed-income futures products and extended ICS trading to these markets. This enables traders to easily execute futures positions across fixed-income markets, often with significant margin savings when compared to OTC instruments.

At the long end of the interest rate term structure, spreads to watch should include those between Treasury, Credit, TBA and Eris SOFR swaps. In addition, Invoice Swap Spread trading remains robust. These markets have shown movement throughout the month of January. For example, margin savings on spread trades between TBA futures and Treasury futures are up to 75% and 70% between Eris futures and Treasury futures. Use the CME Core margin calculation to determine one's margin.

Eris SOFR Swap Spreads have been particularly interesting. Since the beginning of this year, spreads have tightened (become less negative) by 10 basis points in the 10-year. ‌ The ease to trade these spreads at the four most active points 2-, 5-, 10-‌ and 30-year with Eris/Treasury Swap Spreads with significant capital savings is an important space to watch in 2025.

At the short end of the term structure, spreads between T-Bills, SOFR and ESTR futures are also moving and can be traded against one another. The recently listed EUR/USD Cross-Currency Basis futures allow traders to manage their exposure for the change in price of the supply and demand for dollars in an efficient, listed futures contract.

Trading Inter-Commodity Spreads (ICS) on an expanded suite of Interest Rate futures is a sophisticated strategy that can offer numerous benefits. These spreads allow for more efficient execution of commonly traded spreading strategies, thereby reducing the risk of not executing a spread at the desired price. By enhancing liquidity, ICS provides automated arbitrage between outright and spread order books, leading to better matching opportunities. This is particularly valuable during volatile markets, where trading noise in individual legs can be significant. By managing price slippage, ICS helps traders execute their strategies more effectively, ensuring that they can capitalize on market movements with greater precision.

ICS helps traders with execution and risk management and can deliver potential capital savings in margin usage when compared to other strategies. For a complete assessment of one's margin, traders can rely on CME CORE to provide trade and portfolio-level insights.

In the rapidly evolving financial landscape of 2025, traders are facing the dual challenge of positioning and reacting to changes in FOMC policy and frequent announcements from the new administration.

Interest Rate options on futures provide traders with additional risk management tools to navigate a challenging rate volatility environment. CME Group Volatility indices (CVOL) help traders ‌assess current and historical volatility including intra-day real-time series. Built on actively traded liquid options, CVOL provides normal variance that delivers advanced volatility insights that traditional methods often fail to capture, such as skew.

CVOL has moved to a higher volatility regime than prior to 2022, and day-to-day movements in interest rates this year have been dramatic. The 10-Year Note futures average true range has popped higher on several days, highlighting the unpredictable nature of the market. To navigate these challenges, traders are increasingly turning to options on Treasury futures.

Usage of options on Treasury futures has surged, reflecting the growing need for flexible and responsive trading strategies. As of February 10, 2025, the average daily volumes on these options reached 1.568 million, a nearly 14% increase from the end of 2024, when volumes stood at 1.356 million. This uptick in trading activity underscores the critical role that options on Treasury futures play in managing risk and capitalizing on market movements in an era of heightened uncertainty.

Importantly, the composition of Weekly options compared to standard options has changed significantly, further enhancing traders' ability to manage these movements. Over the past eight years, volumes on Weekly Treasury options have nearly quadrupled. By the end of 2024, Weekly options represented 41% of all Treasury option volumes; by February 2025, this figure had increased to 44%. This shift indicates a growing need for shorter-expiry options to manage risk more effectively.

Weekly Treasury options have the same underlying futures as standard options. To help manage weekend risk, Friday options are listed for up to four weeks when including serial and quarterly expiries. Additionally, Monday and Wednesday Weekly options are listed out to two weeks. This expanded range of options allows traders to tailor their risk management strategies for both shorter and longer expiries, providing greater flexibility and precision in their trading activities.

The interplay between the shape of the yield curve, spreads on interest rates ‌ and options on futures is a critical aspect of modern financial trading. Leveraging tools like ICS and CVOL, traders can gain a deeper understanding of market dynamics, manage risks more effectively and capitalize on opportunities with greater confidence.