ST Note - Interest rate futures

Bonds
Junvum Kim

Sales Trader

Summary:  Interest rate futures are mostly traded for hedging short to long term interest rates and cost effective way to improve portfolio returns by speculative trading with benefits of liquidity, leverage, price transparency and low counterparty risk.


RBA raised cash rate by yet another 25 bps to 3.6%, highest in nearly 11 years but dovish tweak of comments about next rate hike triggered spike in AU treasury bond futures.  On the other hand, last night Powell’s hawkish comments in the Senate testimony also hinting possibly raising the terminal rate at this month’s FOMC meeting caused the sell off in the shorter end treasury futures – particularly between 2 and 5 years – and also yield curve (2 year and 10 year) inverted to more than 100bps for the first time since 1981 as 2 year yield rose well above 5% handle while the Fed funds futures now implies 100bps hike in the next 3-4 months.

There are number of key events coming up this month, including  Powell’s testimony in the US house (8th), Kuroda’s final BOJ meeting (10th), NFP (10th), US CPI (14th) and finally crucial FOMC meeting (23rd) that would also update the economic projections and dot plot, therefore we expect volatilities to remain elevated through out creating trading opportunities using broad ranges of futures contracts.

Majority of the interest rate futures available in the platform are traded in CBOT, EUREX or SFE.  In APAC, US 10 year (ZN), 5 year (ZF) & 2 year (ZT) treasury notes have the highest turnover as well as 3 month bills including Eurodollar (GE) – soon to be replaced by SOFR (SR3).  AU 3 year and 10 year T-bond alongside Mini JGB (SJB) and 10 year Japanese government bond (JGB1) are also popular contracts.

Bond futures are quoted in percent of par (e.g. US treasury futures are priced to the nearest 1/32nd of 1% of par or even finer increments for shorter maturities) but non coupon bearing money market (maturity less than 12 months) instruments such as SOFR trade in yield terms so SR3 is converted into IMM (international monetary market) convention (e.g. 100 – compounded daily SOFR interest during contract Reference Quarter).  Similarly AU bonds (XT, YT) are quoted as 100 minus yield to maturity, therefore tick value does not remain the same and fluctuates according to the underlying interest rate.

Interest rate futures are mostly traded for hedging short to long term interest rates and cost effective way to improve portfolio returns by speculative trading (long or short) with benefits of liquidity, leverage, price transparency and low counterparty risk.  SR3 and ZQ are effective tools that are widely used for hedging short-term interest rate risk with monthly expiries while also reflects the expectations of Fed’s monetary policy.  Further more the shape of yield curve can also be anticipated by combining the futures contracts with different maturities to form a spread for six different types of scenarios that could pan out – parallel shift (up/down), bull/bear flattener, bull/bear steepener.

 

Examples of trade ticket & key components of specs

US Treasuries

Name

10-Year T Note

5-Year T Note

2-Year T Note

Ticker

ZNM3

ZFM3

ZTM3

Exchange

CBOT

CBOT

CBOT

Price (% of par)

110'245

106'1575

101'18875

Contract size

100,000

100,000

200,000

Value of 1 point

1,000

1,000

2,000

Tick size

half of 32nd

quarter of 32nd

eighth of 32nd

Tick value

15.625

7.8125

7.8125

 

Secured Overnight Financing Rate & Fed Funds

Name

3-Month SOFR

30-day Fed funds

Ticker

SR3H3

ZQJ3

Exchange

CME

CBOT

Price (100-rate)

94.995

95.110

Contract size

2500 * IMM

4167 * IMM

Value of 1 point

2,500

4,167

Tick size

quarter of bps

quarter of bps

Tick value

6.25

10.4175

 

AU Treasuries

Name

AU 10 year T-Bond

AU 3 year T-Bond

Ticker

XTH3

YTH3

Exchange

SFE

SFE

Price (100-YTM)

96.10

96.38

Contract size

100,000

100,000

Value of 1 point

varies

varies

Tick size

0.010

0.005

Tick value

29.33

45.23

 

JGB

Name

10 year Mini JGB

10 year JGB

Ticker

SJBH3

JGB1H3

Exchange

SGX

OSE

Price (% of par)

146.84

146.88

Contract size

10,000,000

100,000,000

Value of 1 point

100,000

1,000,000

Tick size

0.01

0.01

Tick value

1,000

10,000

 

Margin

https://www.home.saxo/en-sg/rates-and-conditions/futures/initial-and-maintenance-margin

 

Specifications

https://www.home.saxo/-/media/documents/business-terms-and-policies/futures-contract-specifications.pdf?revision=fc71040a-13cf-4910-bbbf-2a9bab921841

 

Expiry for physical settlement (e.g. ZN, ZF, ZT)

  • If the expiry day is prior to the first notice day (FND) as utilised by Saxo Markets, the contract will be closed on the expiry day.
  • If the FND as utilised by Saxo Markets is the same or prior to the expiry day the contract will be closed the trading day prior to such FND.

 

Yield curve & DV01 - dollar value of 1 basis point change

See under summary – CTD/OTR to match duration or work out hedge ratio

e.g. Long 100 lot ZTH3 and short 52 lot ZNH3 with spread ratio of 0.5169 (DV01 of $34.11 / $65.98)

https://www.cmegroup.com/tools-information/quikstrike/treasury-analytics.html

 

CME FedWatch Tool

Probabilities of rate moves at upcoming FOMC meetings implied by 30 day Fed Funds futures

https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html

 

CME TreasuryWatch Tool

Snapshot of yields, auctions & issuance, Fed balance sheet & volatilities.

https://www.cmegroup.com/tools-information/quikstrike/treasury-watch.html

Quarterly Outlook 2024 Q4

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Head of FX Strategy

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Head of FX Strategy

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)


Business Hills Park – Building 4,
4th Floor, office 401, Dubai Hills Estate, P.O. Box 33641, Dubai, UAE

Contact Saxo

Select region

UAE
UAE

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.