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Understanding the FOMC Report

Understanding the FOMC Report

The Federal Reserve, also referred to as the Fed, is the central banking system of the United States and is responsible for guiding U.S. monetary policy. Economic policy announcements and public statements by the Federal Reserve are among the most highly anticipated trading events of the year, since implications for financial markets are so widespread.

The Fed is responsible for buying and selling U.S. government securities in the financial markets and setting interest rates and reserve requirements. The Fed by definition is dual-mandated, Fed policy makers are expected to achieve both stable prices and maximum employment. As a result, public statements made by the Fed and its governors are closely watched by traders, since even the smallest changes in monetary policy and federal funds rates can create large market-moving events.

The Federal Open Market Committee

The Federal Open Market Committee (FOMC) consists of twelve members: the seven members of the Board of Governors of the Federal Reserve System, the president of the Federal Reserve Bank of New York and four of the remaining eleven Reserve Bank presidents, who serve one-year terms on a rotating basis.

For traders, FOMC meetings are a time of particular volatility because any change in federal fund rates can affect a range of economic variables such as short-term interest rates, foreign exchange rates, long-term interest rates, employment output and prices of goods and services.

The FOMC meets eight times a year to discuss monetary policy changes, review economic and financial conditions and assess price stability and employment output. These meetings take place every six weeks. Four of these meetings feature a Summary of Economic Projections (SEP) followed with a press conference by the chair. The minutes of the scheduled meetings are released three weeks after the date of the policy decision.

Trading on the Fed’s Decisions

The Fed provides a wealth of data that can influence the markets. In addition to the Fed’s headline interest rate, traders also study the post-meeting press releases, which highlight the state of the economy. Since some information contained in the press release may look forward to policy changes at future meetings, the contents of this release carry a risk of catching market participants off guard. It is for this reason that traders pay particular attention to press releases, speeches and other public appearances by Fed members that occur between FOMC meetings.

There are a number of factors to think about when trading before and after FOMC meeting announcements, but with a little insight and thorough preparation it is an event that offers numerous opportunities for traders throughout the year.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Trading the Link Between USD/JPY and U.S. Treasury Securities

In the latest Trader’s Edge video, we explore the relationship between U.S. Treasury securities and the USD/JPY exchange rate, and the opportunities it can present with Treasury yields on the rise. Topics include:

Recent weakening of the U.S. dollar vs. the Japanese yen
Why rising yields in U.S. rates have not strengthened the dollar
How a higher yield and weaker dollar affects Japanese holders of U.S. Treasuries
Why Japanese investors could be on verge of selling U.S. Treasuries
How higher Treasury yields could help strengthen the USD/JPY exchange rate

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Trading the U.S. Treasury Curve: Twos versus Tens

The U.S. Treasury Bond market is the largest and deepest government debt market in the world. Individual U.S. Treasury Notes and Bonds provide important benchmark yields at various points along the yield curve.

Trading the slope of the U.S. Treasury curve using futures contracts involves the execution of an inter-commodity spread. One very common and widely quoted yield curve spread is the twos versus tens yield spread. This spread compares and reflects the difference in yields between the current U.S. Treasury 10-Year note and the current U.S. Treasury 2-Year note.
Watch this video to learn more about this spreading technique.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Treasury Intermarket Spreads – The Yield Curve

Once you understand how to calculate the basis point value (BPV) of a U.S. Treasury futures contract and dollar-weighted hedge ratios versus other fixed income securities, it is short walk to how to spread one contract versus another.

Understanding Spread Trades

A spread trade is one where the trader buys one and simultaneously sells another highly correlated futures contract. Spreads can be intra-market, like a time spread, also known as a calendar spread, buying one month and selling another of the same product. Or spreads can be constructed between similar products like buying corn and selling wheat.

Within the U.S. Treasury futures complex it is very common to spread one U.S. Treasury contract against another. Because CME Group lists multiple U.S. Treasury futures based on targeted maturities (2-year, 5-year, 10-year, Ultra 10-year, Bond and Ultra-Bond) traders can construct spread trades to express a point of view on the slope of the yield curve.

The Yield Curve

U.S. Treasury securities are traded based on price, but also reflect a corresponding yield-to-maturity (YTM). If you were to take all of the government securities and plot them on a grid with the x-axis showing their maturity dates and y-axis showing their yield-to-maturity you would end up with what looks like an upward sloping pattern left to right.

The grid of yields versus maturity is known as the U.S. Treasury yield curve, or simply the yield curve, . Normally quoted using the most recently auctioned U.S. Treasury securities called on-the-runs (OTR), the yield curve expresses the yield difference between various points along the curve.

For example, one frequently quoted yield spread is the difference between the 2-year note and 10-year note. If you were told the 2/10 yield curve was 150 basis points that would generally mean the yield of the 10-year was 150 basis point higher than the yield of the 2-year note.

Yield curves can be positively sloped, flat or negatively sloped (inverted). When a trader or risk manager places a yield curve trade she is more concerned with the relative value, or difference in yields, between the securities than whether absolute yields rise or fall.

Traders can and do express opinions on the U.S. Treasury futures yield curve by spreading one U.S. Treasury futures contract versus another. Looking back at the 2/10 spread mentioned above, a similar trade could be constructed using futures contracts.

Building a Spread

The spread begins with what we already know about U.S. Treasury futures, they trade like their CTD securities and we can calculate their implied BPV.

If we wanted to buy a 2/10 yield spread using futures, we must first identify which U.S. Treasury futures contracts we want to use to build the spread. We know there is a 2-year futures contract but what about the 10-year side?

There are two futures contracts listed by CME Group that derive their value from 10-year U.S. Treasury securities, the Classic 10-Year and the Ultra 10-Year. Which should we use? The Ultra-Ten Year tracks a CTD that trades closer in maturity to the OTR 10-year so we will use it for our example. So for our example we would buy the 2-year future and sell the appropriate number of Ultra 10-Year futures.

The second step is to identify each contract’s CTD issue, then, based on its CTD’s BPV and conversion factor, calculate each contract’s implied BPV. Then we can compare the respective BPVs and, with a little math, arrive at the appropriate spread ratio (SR). Mathematically it would look like this:

Spread Ratio (SR) = BPVultra-ten ÷BPV2-year

Assume that the 2-Year (TUH7) has a BPV of $46.25 per contract and the Ultra 10-Year (TNH7) has a BPV of $128.78. Plug this into the formula above and we get:

SR= 128.78 ÷ 46.25 = 2.78, or roughly 3:1 TUH7 to TNH7

By buying three TUH7 contracts versus one TNH7, this spread is effectively dollar-neutral. That means it is less subject to profit and loss based on direction of the market and more subject to change in the yield difference between the contracts. This trade is about changes in slope rather than changes in outright yield. Because U.S. Treasury futures prices move in an inverse relationship to yield, if one is buying the 2/10 they are anticipating the slope to steepen, or increase, between 2/10s.

We recognize traders and risk managers utilize U.S. Treasury futures to trade the slope of the yield curve and conveniently list yield curve trades weighted and rounded to whole number ratios on our website and on CME Globex.

Summary

Yield curve trades are a common and frequently executed trade in both cash and futures U.S. Treasury markets. They can provide added value to risk managers and traders alike. Understanding the pricing and trading behavior of CME Group U.S. Treasury futures contracts and how they relate to the underlying cash Treasuries is essential to using them effectively.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Treasuries Hedging and Risk Management

Hedging interest rate risk with CME Group U.S. Treasury futures begins with identifying the futures contract’s CTD security. Once identified, we can determine the implied basis point value (BVP). BPV is also known as value of a basis point (VBP) or dollar-value of an .01 (DV01). They all refer the same thing, the financial change of the security or portfolio to a change in a 0.01% change in yield. To construct the proper dollar-weighted hedge ratio versus the product or position at risk we need to first determine the BPV.

Calculating Basis Point Value

The calculation for the BPV is simple: the contract’s CTD BPV divided by the CTD conversion factor (CF).

BPVcontract = BPVctd ÷ CFctd

Once we have the BPV, all we need is the BPV at risk.

Example

Assume you are long $100 million of a U.S. Treasury portfolio with an average BPV of $450 per million. This BPV is closest to the BPV of the CME Group U.S. Treasury 5-Year Note futures contract so we will use it as our hedging instrument.

The CTD for the 5-Year contract versus the March 2017 expiry is the 1.375% of May 31, 2021. It has a BPV of 42.45 per $100,000 face value and a conversion factor of 0.8317.

We use $100,000 because that is face value of one 5-Year Note futures contract. Our risk position is quoted in million-dollar increments so we will make a slight multiplication to adjust apples for apples.

For our example, we have the following: BPVcontract = 42.45 / 0.8317 = $51.04

The next step is to determine the value at risk. Our portfolio was $100 million and the average BPV per million was $450. Therefore, 450 x 100 = $45,000 value at risk.

Now we can calculate our hedge ratio. We will use the following formula:

Hedge ratio (HR) = Value at risk ÷ Value of contract, or

HR = BPVrisk ÷ BPVcontract

HR = 45,000 / 51.04 = 881.66 or 882 5-Year futures

Because we are hedging a long position that is exposed to higher interest rates we would sell the futures contracts.

It would be highly unlikely for a portfolio manager to hedge her entire risk position. That would effectively leave her with no rate exposure. In other words, if rates went lower, she would not participate in the capital gain of higher prices. Usually risk managers of large rate positions use futures contracts to hedge a portion of their risk or to modify their portfolio’s target duration.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Calculating U.S. Treasury Pricing

Treasury Price/Yield Calculator

Pricing U.S. Treasury bonds, notes and futures can look at first glance to be much different than the pricing of other investment products.

Cash bonds and futures based on U.S. Treasury securities do not trade in decimal format but in full percentage points, plus fractions of a 1/32 of par value. For example, if you were to see a quote on a broker/dealer screen showing U.S. Treasury prices you might encounter something like this:

10 YR 2.250 2/15/27 99-032 / 99-03+ 10/20

This quotation would indicate the current on-the-run (OTR), or most recently auctioned, 10-year note with a coupon of 2.250% and a maturity date of February 15, 2027 is currently 99-032 bid and offered at 99-03+, $10 million bid with $20 million offered.

The bid-side price of 99-032 is not 99.032 but rather 99 full points of par value plus 3.25 1/32s of a point. In the cash market, the third digit might be two, plus or six. The two constitutes 2/8, or ¼, of a 1/32. A plus constitutes ½ of 1/32, and six constitutes 6/8, or ¾, of 1/32. So our bid-side quote converted from 1/32 to a decimal would be: 99-032 (1/32s) = 99.1015625, or 99.1015625 percent of par. The offer-side price would convert to 99-03+ = 99.109375.

If you were to view a U.S. Treasury futures price quotation you might encounter something like this: TNM7 134-010/134-015.

The same concept as the cash market convention applies. The bid-side quote represents 134 full points plus 1/32 of a point. The converted price into decimal would be 134-010 = 134.03125, and so forth for the offer-side price. In futures you might see 134-012 for 1-1/4 (1/32), 134-015 for 1-1/2 (1/32), or 134-017 for 1-3/4 (1/32).

While seemingly complicated, it becomes second nature after a while. Cash Treasuries and futures based on U.S. Treasuries trade in points and fractions of points (1/32). But when doing any mathematical calculations, we must first convert from 1/32 to decimal, do the calculation, then convert back to 1/32 price convention.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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How Can You Measure Risk in Treasuries?

When it comes to measuring risk for fixed income (rates) traders and portfolio managers, they tend to use one or two yardsticks, value of a basis point and modified duration.

Value of a basis point (VBP), also known as basis point value (BPV), or, for U.S. dollar products, dollar-value of an 01 (DV01),is the financial effect of a 0.01% (one-basis point) change in that instrument’s yield.

For example, if a 10-Year note is current 1.30% yield to maturity with a DV01 of $859 per million par value and the yield goes up by 0.01 to 1.31%, we would expect the financial value of that note to drop by $859 per million par.

DV01

One can identify the DV01 of individual securities or an average DV01 of a whole portfolio. DV01s tend to get larger as you move out the yield curve.

For example, a 2-Year U.S. Treasury note may have a DV01 of $185 per million par while a 30-year Treasury bond may have a DV01 or $2,131 per million par.

Modified Duration

Modified duration represents the financial effect as a percentage gain or loss to a 1.0% (100 basis points) change in underlying yield.

For example, consider our previously mentioned 10-Year note: if its duration was 8.95 years and yields move higher from 1.30% to 2.30%, or by 1.0%, we would expect the value to fall by 8.95% in value.

Treasury	DV01
Ultra 30-Year	$289.34
30-Year	$213.14
Ultra 10-Year	$115.84
10-Year	$76.55
5-Year	$47.94
2-Year	$36.97

In general, the longer the maturity, the greater the price sensitivity and risk. Duration measures this risk precisely.

Traders and portfolio managers routinely refer to your position or portfolio in basis point value and modified duration terms.

Implied Basis Point Value and Implied Duration

U.S. Treasury futures can also be referred to in implied duration and implied basis point value terms.

To look more closely at the BPV and modified duration of a futures contract, we must first go back to the concept of a U.S. Treasury futures contract’s cheapest-to-deliver (CTD) security. You may recall from previous modules a U.S. Treasury futures contract’s CTD security is the eligible bond or note that is most financially efficient for the short position to deliver to the long position at contract expiration. Very few market participants go all the way to delivery, in fact the number is quite low (usually less than 5% of open interest).

The reasons we want to know about the CTD security is two-fold: contracts trade like their CTD security and we will use the CTD security and its conversion factor to arrive at that contracts implied BPV.

Once we know a U.S. Treasury’s CTD security we can determine that security’s BPV per $100,000 face value (or $200,000 face value in the case of 2-Year note futures). We use $100,000 because, with the exception of 2-year notes which have an underlying face value of $200,000 per contract, U.S. Treasury contracts have an underlying face value of $100,000 per contract.

Once we know a contract’s CTD we can determine its BPV; and using that security’s conversion factor (CF) and some simple mathematics, arrive at the implied BPV.

Assume we have a 5-Year Note futures contract and its CTD security is the 1.375% of May 31, 2021 with a BPV per $100,000 of $42.45 and a conversion factor of 0.8317.

To arrive at the BPV, we take the BPV of CTD and divide it by its conversion factor:

BPVcontract = BPV ctd ÷ CF

For our example, BPVcontract = 42.45 / 0.8317 = $51.04 per contract.

Once we have the implied BPVs for the U.S. Treasury futures contracts we can use them to calculate appropriate dollar-weighted hedge ratios versus a cash security of portfolio. We could also calculate the spread ratios between futures contracts so we can construct dollar-weighted yield curve trades.

Interest rate traders and managers of risk use basis point value and modified duration to measure their market risk. Futures contracts based on U.S. Treasury securities can also be referred to in implied basis point value and implied modified duration with a little knowledge of how the contracts price and behave and some simple math. Knowing the contract’s CTD is the starting point.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Get to know Treasuries CTD

Now that you have a deeper understanding of the U.S. Treasury basis, we need to delve a little deeper into what is known as the cheapest-to-deliver (CTD) security. While each U.S. Treasury futures contract has its own basket of eligible securities for delivery generally one, or sometimes two, price out to be most efficient for the short position to deliver to the long position. This security is most efficient because it is considered cheaper or cheapest to deliver versus the other alternative securities.

Knowing which security is the CTD is important because the futures contract tends to trade like the CTD security. It is also important when calculating hedge ratios because the futures contract’s theoretical basis point value is derived from the CTD security.

What Determines the CTD?

Before we dive deeper into how to ascertain which issue is the CTD some additional background on the market forces that go into the calculation might be useful. If we take a snapshot of a typical U.S. Treasury futures contract settlement prices of quarterly contracts currently listed for trading, we will see a discernable pricing pattern.

Example

On February 10, 2017 the following were the settlement prices for the listing quarterly futures for the 10-Year Note (ZN) futures:

March 2017 = 124-250

June 2017 = 124-075

September 2017 = 123-280.

Notice that as the futures contract goes out further in time, the price goes lower in value. There is a very good reason for this. Remember that the underlying product of a U.S. Treasury futures contract is a U.S. Government security that pays interest twice per year based on its coupon value established when it was originally auctioned. This means the cash Treasury is an asset. Futures contracts are not assets. They represent a price point for future delivery. Because of this opportunity cost, or time value of money, the futures prices trade at a discount or premium to cash.

The Yield Curve

On February 10 when these prices were posted, the yield curve for U.S. Treasuries was positively sloped, that is, rates at the short end of the yield curve were lower than yields further out. Generally speaking, when the yield curve is positively sloped it results in what we call positive carry. If I borrow overnight funds (short-end) and buy a long dated (long-end) U.S. Treasury security with a higher paying rate I enjoy positive carry. To account for this revenue in the underlying physical note or bond the futures contract must price at a discount and gradually converge to cash by time of delivery.

Carry can be either positive or negative depending on the level of rates and the slope of the yield curve.

Example

It might be useful to walk through the financial calculation for carry to see why this works and why it is important regarding the CTD.

Assume we buy the 1-3/4% of November 30, 2021. This issue is eligible for delivery into the March 2017 5-Year Note (ZFH7) contract. We borrow funds through the repo market to purchase this security and will be charged an interest rate known as the repo rate every day we keep this borrowed position open. Carry is defined as the difference between the coupon income and the financing cost.

Carry = Coupon Income (CI) – Financing Cost (FC)

Assume the CI = $599.45 per million face value from original trade settlement date to futures contract last delivery date. Additionally, assume the FC = $206.54 for the same terms. Therefore, Carry = 599.45 – 206.54 = $392.91. Notice the carry number is positive.

If we were to calculate the carry for all the ZFH7 futures contracts eligible securities, we could then use that number along with each security’s basis to determine each eligible security’s net basis.

Net basis = Basis – Carry

This is important because the issue with the lowest net basis tends to be the CTD issue.

Implied Repo Rate (IRR)

There is another widely accepted method for determining the CTD issue. It is called the implied repo rate (IRR). It is a theoretical yield produced by buying the cash security, selling the futures contract, lending the cash security in the repo market and finally, delivering the security into the futures contract on last delivery day. The issue with the highest IRR is generally considered CTD. What you will find if you follow these methods is they arrive at the same result. Bloomberg, for example, has a function that calculates the CTD for U.S. Treasury futures using both methods.

The point of knowing the CTD is to understand how the futures contract will behave. U.S. Treasury futures contracts trade like their CTD securities. Knowing what goes into determining the CTD issue is useful to understanding U.S. Treasury futures valuation. It can also help understand how the CTD can shift or change

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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Understand Treasuries Contract Specifications

Futures markets trade standardized futures contracts, which means futures that share an underlying asset are interchangeable. They have certain terms that are clearly defined by the futures contract and are usually summed up the contract specifications.

Contract specifications can be thought of as the agreement between the buyer or seller of the futures contract and the exchange that lists and clears that futures contract. Knowing a futures contract’s specification is important because it outlines the contract’s terms and obligations. Additionally, it may provide insights into how the contract will price and behave versus the underlying physical product or index.

In this module, we will consider the contract specifications for U.S. Treasury futures. CME Group lists active futures on U.S. Treasuries at numerous points along yield curve. Each futures contract has its own contract specifications; some contracts have similar terms while other terms are specific to a unique contract.

Identifying Maturity Points

To begin, we will need to identify the maturity points of the actively traded U.S. Treasury futures curve. Be advised that the futures contract name may not perfectly reflect that contract’s true deliverable U.S. Treasury security maturity. Currently CME Group has 2-Year Note, 5-Year Note, 10-Year Note, Ultra 10-Year Note, U.S. Bond and Ultra Bond futures contracts.

Important Specifications

We will explore the following specifications that are necessary for you to understand the contract structure, pricing and quotation mechanism, and delivery grade securities that provide the underlying product and trading cycle:

Contract size
Contract factor
Delivery grade for final settlement
Price quotation
Minimum price fluctuation (tick size)
Listed contract months
Termination of trading (last trading day)

The 2-Year Note

The 2-Year Note has a contract size of $200,000 face-value per contract. This size is unique to 2-Year Notes as all other active U.S. Treasury futures have a face value of $100,000.

When calculating a 2-Year Note’s invoice amount, CME Group calculations sometimes refer to a contract factor. The contract factor for 2-Year Notes is $2,000 per contract. The delivery grade of a U.S. Treasury futures contract refers to the U.S. Treasury securities eligible to be delivered into the futures contract that will fulfil the terms for final settlement.

All CME Group U.S. Treasury futures contracts settle to a physical delivery of an underlying U.S. Treasury note or bond. But each individual contract has its own list of securities that can be delivered. In other words, the short position, responsible for making delivery, cannot simply pick any government security and deliver it to the long position, responsible for accepting and paying for delivery. The short position must choose from one of several securities eligible according to the contract specifications.

For 2-Year Note futures, the eligible securities are defined as, “U.S. Treasury notes with an original term to maturity of not more than five years and three months and a remaining term to maturity of not less than one year and nine months from the first day of the delivery month and a remaining term to maturity of not more than two years from the last day of the delivery month. The invoice price equals the futures settlement price times a conversion factor, plus accrued interest. The conversion factor is the price of the delivered note ($1 par value) to yield 6 percent.” (Source: 2-Year Note Contract Specifications).

2-Year Note futures trade in points and fractions of 1/32 of a point. The smallest increment a 2-Year Note futures contract can trade in is a ¼ of a 1/32. Since the 2-Year Note has a face-value of $200,000 per contract 1/32 is equal to $62.50 per contract. Therefore, the minimum tick, or smallest increment of price change, is ¼ of 1/32 a tick is worth 0.25 x $62.50 or $15.625 per contract.

2-Year Note futures list three consecutively quarterly contract months at a time following the March, June, September, and December expiration cycle.

Termination of trading, also known as last trading day (LTD), is the last business day of a quarterly contract month. The last delivery day (LDD) is three business days after the last business day of a quarterly contract month.

The 5-Year Note

5-Year Note futures are similar to 2-Years in their listing cycle; they are listed in three consecutive quarterly expiration months following the March, June, September, December cycle. 5-Year Notes have a face value of $100,000 per contract and a contract factor of $1,000 per contract.

The deliverable grade for 5-Year Notes is, “U.S. Treasury notes with an original term to maturity of not more than five years and three months and a remaining term to maturity of not less than four years and two months as of the first day of the delivery month. The invoice price equals the futures settlement price times a conversion factor, plus accrued interest. The conversion factor is the price of the delivered note ($1 par value) to yield 6 percent.” (Source: 5-Year Note specifications)

Like all U.S. Treasury futures, 5-Year Note futures trade in points and fractions of a 1/32. The minimum price fluctuation, or tick size, is ¼ of a 1/32. Since the face value of the 5-Year Note future is $100,000 a 1/32 is worth $31.25, therefore ¼ of a 1/32 is equal to 0.25 x $31.25 = $7.8125, rounded to the nearest cent per contract.

Last trading day and last delivery day are the same as 2-Year Notes. LTD for 5-Year notes is the last business day of a quarterly contract month and LDD is three business days following the last business day of the quarterly contract month.

The 10-Year Note

10-Year Notes and all the consecutively longer maturity contracts also have a $100,000 face value and $1,000 contract factor amount. The 10-Year Note’s delivery grade is, “U.S. Treasury notes with a remaining term to maturity of at least six and a half years, but not more than 10 years, from the first day of the delivery month. The invoice price equals the futures settlement price times a conversion factor, plus accrued interest. The conversion factor is the price of the delivered note ($1 par value) to yield 6 percent.” (Source: 10-Year Note specifications)

10-Year Note futures minimum price fluctuation, or tick size, is ½ of 1/32. Therefore, the minimum price change would be 0.50 x $31.25 = $15.625, rounded to the nearest cent per contract. CME Group lists three consecutive quarterly contracts in 10-Year Notes.

LTD and LDD are different than 2- and 5-Year Note futures. The 10-Year Note ceases trading (LTD) seven business days prior to the last business day of the quarterly contract month. The LDD for 10-Year Notes is the last business day of the quarterly contract month.

Ultra 10-Year Note

Ultra 10-Year Notes list, price and trade just like the original 10-Year Notes described above.

The only difference in specifications between the 10-Year Note and Ultra 10-Year note is in the delivery grade. Securities eligible for delivery into the Ultra 10-Year are referenced as, “Original issue 10-Year U.S. Treasury notes with not less than 9 years 5 months and not more than 10 years of remaining term to maturity from first day of futures delivery month. The invoice price equals the futures settlement price times a conversion factor, plus accrued interest. The conversion factor is the price of the delivered note ($1 par value) to yield 6 percent.” (source: Ultra 10-Year Note contract specifications).

U.S. Treasury Bonds

The original U.S. Treasury Bond contract, sometimes referred to as the Classic Bond, has a face value of $100,000 per contract and a contract factor of $1,000.

Its deliverable grade is defined as, “U.S. Treasury bonds that have remaining term to maturity of at least 15 years and less than 25 years from the first day of the futures delivery month.* The delivery invoice amount equals the futures settlement price times a conversion factor, plus accrued interest. The conversion factor is the price of the delivered bond ($1 par value) to yield 6 percent.” (Source: U.S. Treasury Bond contract specifications)

The minimum price fluctuation is 1/32 of a point or $31.25 per contract. CME Group lists three consecutive quarterly month contracts of this contract. Its LTD is seven business days prior to the last business day of the quarterly contract. LDD is the last business of the quarterly contract month.

The Ultra Bond

The Ultra-Bond contract is just like the Classic Bond except in deliverable grade terms.

The delivery grade terms for the Ultra-Bond are, “U.S. Treasury bonds with remaining term to maturity of not less than 25 years from the first day of the futures contract delivery month. The invoice price equals the futures settlement price times a conversion factor, plus accrued interest. The conversion factor is the price of the delivered bond ($1 par value) to yield 6 percent. (Source: Ultra Bond contract specifications).

Summary

Understanding how to read contract specifications is important because the specs define the terms and obligations of the buyers and sellers and may provide clues into how a contract prices versus its underlying product.

If you have questions send us a message or schedule an online review .

Regards,
Peter Knight Advisor

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