CME Group Futures "Pace of the Roll" Tool

The Treasury futures roll represents the shift in open interest from the expiring front month quarterly futures contract to the deferred quarterly futures contract (e.g., from the September futures expiry to the December futures expiry). During the roll, market participants offset existing market positions in the front month contract while re-establishing new positions in the deferred month contract.

Rolling Treasury futures involves replacing an existing market position in the expiring front month futures contract with a new position in the deferred month futures contract. Market participants have two options to accomplish the Treasury futures roll.

The first option involves two separate market transactions. This method requires market participants to unwind existing open positions in the front month Treasury futures contract with one transaction while re-establishing new open positions in the deferred month Treasury futures contract in a second transaction. Since this option requires market participants to “leg” each side of the Treasury futures roll, this method doubles the execution risk of rolling and potentially exposes participants to market risks before the second transaction is completed. For these reasons, most market participants avoid rolling positions in two separate transactions.

As a second option, market participants can transfer open interest from the front month Treasury futures contract to the deferred month Treasury futures contract by trading calendar spreads. A calendar spread is single transaction that combines a simultaneous purchase and sale of two futures contracts with different expirations. For example, a market participant who is “short” the expiring front month Treasury futures contract can re-establish a short position in the deferred month Treasury futures contract during the roll by buying the calendar spread (i.e., buying the expiring front month contract while simultaneously selling the deferred month contract). Alternatively, a market participant who is “long” the expiring front month Treasury futures contract can re-establish a long position in the deferred month Treasury futures contract during the roll by selling the calendar spread (i.e., selling the expiring front month contract while simultaneously buying the deferred month futures contract). Calendar spreads are the preferred method for rolling Treasury futures since this strategy mitigates execution and market risks.

The Treasury futures roll occurs on a quarterly basis that coincides with the March, June, September, and December delivery cycle of the Treasury futures contracts. There is no exact definition of when the roll occurs, and theoretically it can begin months before the expiration and last right up until the contract’s last trading day. However, in recent history the majority of the open interest rolls during the last 10 business days before the contract month begins. For example, in February 2016 this was from 2/15/2016 through 2/29/2016.

The tool provides the flexibility to see the axis in one of two ways

• Days until last trade day. This varies between the Treasury futures products. The shorter duration notes (2-Year and 5-Year) can trade until the last business day of the contract month, while the longer duration notes (10-Year, Ultra 10-Year, 30-Yr Bond, and Ultrabond) cease trading on the seventh business day preceding the last business day of the delivery month.
• Days until first notice day. This is the same day for all Treasury futures products, and is the last business day of the calendar month before the contract month. 

For open interest holders who prefer to carry core positions in Treasury futures over time, the Treasury futures roll is important for two reasons.

First, the Treasury futures roll indicates the optimal liquidity period to roll a futures position forward from the expiring front month futures contract to the deferred month futures contract. Since most market participants wish to avoid the physical delivery process that is associated with Treasury futures, the roll provides participants with the liquidity they require to maintain core open positions without the encumbrances of cash market delivery.

Second, the Treasury futures roll signals the optimal liquidity period to roll a futures position in the event of a mispricing in the calendar spread between the expiring front month contract and the deferred month contract.

• For basis traders, trading mispriced calendar spreads can help establish richer or cheaper basis trades in deferred month contracts. If the calendar spread is priced below fair value, long basis traders can buy the spread and roll their short futures positions from the expiring front month contract to the deferred month contract. If the calendar spread is priced above fair value, short basis traders can sell the spread and shift their long futures positions to the deferred month contract.
• For hedgers, trading mispriced calendar spreads can mitigate the cost of running a hedge in deferred months. If the calendar spread is cheap, hedgers can buy the spread and roll their short positions from the expiring front month contract to the deferred month contract. If the calendar spread is rich, hedgers can sell the spread and shift their long positions to the deferred month contract.

Pace of Roll Tool