Introducing Yield Futures

With nearly 13.5 million contracts of open interest, representing over $1.5 trillion in notional value, the US Treasury futures complex at CME Group provides one of the financial market’s deepest liquidity pools for management of interest rate risk for US government debt. However, given the unprecedented growth in underlying issuance, and the unique position of UST Notes and Bonds in the overall debt market, demand has grown for tools that broaden access to rates exposure.

The Yield futures contracts allow market participants direct exposure to US Treasuries at key points on the curve, with yield-based pricing, cash settlement, and fixed DV01 and duration:

The most noticeable difference between the Yield futures and other interest rate futures is pricing directly in annual yield, as determined by the corresponding BrokerTec US Treasury benchmarks⁵ for on-the-run CUSIPs. With a contract value of $1,000 per index point, and a minimum tick of 0.001 or 1/10 basis point, this allows a minimum price fluctuation of just $1.00 per contract.

Because the US Treasury holds auctions at each tenor once per month, liquidity will be concentrated in a single contract, with a second available for the roll at month end. Cash settlement to the benchmark on the final business day of the month will remove any operational risks of physical delivery.

For settlement purposes, the BrokerTec US Treasury benchmarks⁶ were chosen for their robust transaction base and deep liquidity. Overseen by CME Group Benchmark Administration, they provide snapshots of average market pricing in the 2-, 5-, 10-, and 30-year on-the-run (OTR) CUSIP, and are aligned with IOSCO Principles.

Each tenor sees monthly auctions, with the sizes for the two most recent quarterly cycles included below:

Source: Treasury.gov

As BrokerTec lists each new cash OTR contract for trading, the BrokerTec US Treasury benchmarks in turn are calculated as volume weighted average yields (VWAYs) across the 15-minute periods immediately preceding these times: 11:00 a.m., 3:00 p.m., 4:00 p.m., and 5:00 p.m. ET.⁷

Of these, the 3:00 p.m. ET (2:00 p.m. CT) fixings are on average the most liquid and align with the settlement time of existing US Treasury futures at CME Group.

On February 1, 2021, BrokerTec cash Treasuries transitioned to CME Globex. Over the subsequent four months through May, total daily trading averaged approximately $100 billion, never dropping below one third that.

From the start of 2018 through May 2021, average volumes per 15-minute VWAY interval are shown below:

Source: BrokerTec

Source: BrokerTec

Traditional US Treasury futures at CME Group are defined by a constant notional of either $100,000 or $200,000, leading to a risk exposure level that varies across the yield curve as well as with respect to outright price level. Yield futures offer an alternative with a fixed risk exposure, set to $10 DV01 (dollar value per basis point of yield move). This constant DV01 also removes the convexity, or nonlinear relationship, between price and yield.

* Example values from August 2021, subject to market movements

Price movements will look similar to short-term interest rate products such as Federal Funds and SOFR futures, albeit with a smaller contract unit:

Because the on-the-run or most recently issued CUSIP will always be the reference point, the Yield futures will also maintain a relatively fixed duration, moving no more than a month. This contrasts with the cheapest to deliver (CTD) CUSIP that drives traditional US Treasury futures, allowing swings across the range of the deliverable basket depending on the interest rate environment.

Combining these two features, it is apparent that the Yield futures serve to complement currently available risk management tools on the yield curve:

Having DV01 not only constant but also matched across the curve makes for simpler inter-commodity spread calculation and hedging. Any two points on the curve can be hedged with a 1:1 pair of positions in opposite directions, and the yield difference in basis points can be found by subtracting the price of the two contracts.

Example: with 2-Year Yield futures at 0.25 and 10-Year Yield futures at 1.20, the spread is 95 basis points, and a position of one long 2YY and one short 10Y increases (decreases) in value by $10 for each basis point the spread narrows (widens).

The roll is also simplified, which will be increasingly relevant given the monthly auction schedule.  Traditional fixed-notional contracts have slightly different DV01 values between adjacent quarters, requiring “tail” positions to be calculated each roll to match exposure⁸.  For example, rolling 100 contracts in the expiring quarter may require 105 contracts in the new quarter.  For monthly Yield futures, the roll ratio will always be 1:1.

Contract specifications

While the Yield futures differ in several key respects from existing US Treasury futures, it is expected that they will remain closely correlated, with differences representing the market outlook of future differences between the CTD and OTR CUSIPs.

Looking at daily price movements since the start of 2019, the 2yr, 5yr, and 30yr have a 99% correlation, with the 10yr at 98%, but there are also some local departures that could represent trading opportunities:

As Treasury issuance continues to rise, policy uncertainty grows, and more market participants find themselves in need of a hedge for interest rate swings, the Yield futures will present a path to direct rates exposure with minimal barriers to entry and added complexity.

1. 2-Year Yield futures: Contract Specs 
2. 5-Year Yield futures: Contract Specs 
3. 10-Year Yield futures: Contract Specs
4. 30-Year Yield futures: Contract Specs 
5. CME Group Benchmark Administration: https://www.cmegroup.com/market-data/cme-group-benchmark-administration.html#fixed-income
6. BrokerTec US Treasury Benchmarks: https://www.nexdata.com/indices/fixed-income/brokertec-us-treasury-benchmarks/
7. BrokerTec Benchmark Methodology: https://www.cmegroup.com/market-data/files/benchmark-administration-brokertec-methodology.pdf
8. Treasury Futures Calendar Spreads with Tails: https://www.cmegroup.com/education/articles-and-reports/treasury-futures-calendar-spreads-with-tails.html