Tra
ading
g an
nd Trrack
king Treasurry
Futtures Yield Curv
C ve S
Sprea
ads on
CM
ME Globe
G ex
30 OCTO
OBER 201 4
Jonathan Kronstein
K
Agha Mirza
a
Research & Prroduct Developm
ment
Interest Rate Business
B
Line M anagement
+1 312 930 34
472
+1 212 299 28
833
jonathan.kronstein@cmegroup
p.com
agha.mirza@c
cmegroup.com
Treasury futu
ures yield curv
ve spreads ha
ave been a ke
ey element off CBOT Treassury futures trading as earrly
as 1982, whe
en 10-Year Trreasury Note futures were added to the complex. Trrading the Tre
easury yield
curve on CME Globex has
s been facilita
ated by many sophisticated
d front-end so
olutions. In 20
008, CME
Group introdu
uced Treasurry yield curve spreads on CME
C
Globex tto complemen
nt the existing
g technology..
The CME Gro
oup spread engine
e
is referrred to as Inte
ercommodity S
Spreads (ICS
S).
Treasury
y Yield Curve Sprea
ads on CM
ME Globe
ex
on CME
The Treasury
y yield curve spreads
s
such
h as the NOB,, FYT, and BO
OB, are availa
able to trade o
Globex. The
ese spreads are
a weighted based
b
upon ra
atios of DV01
1s, dollar valu
ue of one basiis point, and/o
or
market conve
ention. These
e spreads are
e matched against the outrright order books of spread
d legs with
implied pricin
ng and/or othe
er spread orders. The matc
ching againstt the outright o
order book en
nsures spread
ds
are executed
d during volatile market con
nditions. In co
ontrast, front--end solutionss need to, and may prefer
to, leg the sp
preads, but no
ot without the risk of missin
ng the leg.
Pricing Engiine
The Treasury
y yield curve spreads
s
on CME
C
Globex utilize
u
a net ch
hange pricing
g methodologyy which was a
well-establish
hed market co
onvention for quoting these
e spreads witth consideration given to th
he weightingss
for each of th
he outright leg
gs. The net change repres
sents the (nett change of th
he front leg)-{((net change o
of
the second le
eg)/price ratio
o}. The price ratio represen
nts the quotie
ent of (front le
eg quantity/ba
ack leg
quantity). By
y dividing the price change
e of the back leg, we have e
effectively takken the differe
ent weighting
gs
into considerration. It is im
mportant to no
ote that the pricing engine ffor each of th ese spreads “resets” to ze
ero
for each new
w trading day.
The following
g chart shows
s intraday pric
cing for the De
ecember 2014
4 NOB (10Yrr (TY)/T-Bond
d (US) spread
for the week of September 22, 2014.
Data Source: Bloomberg.
2
| Treasury Yield Curve Indexes | 30
3 October 2014
| © CM
ME GROUP
Treasury Yield Curve Spread Tracker
In response to customer demand, CME Group developed a Treasury Yield Curve Spread Tracker tool to
provide a time series of these actively traded futures spreads because the CME Globex pricing is on net
change basis. Treasury Yield Curve Spread indexes apply the same ratios as CME Globex spreads.
Treasury yield curve spread indexes are calculated in the following manner:
(front leg price * # contracts front leg of spread) minus (back leg price * # contracts back leg of spread)
For example, on September 24, 2014, the Dec 2014 3:2 FYT (FV (5-Yr)/ TY(10-Yr)) settled at 105 and
23/32nds on the CME Group’s Spread Tracker based on September 24, 2014 settlement prices for the
respective legs, FVZ4 (118-10.75/32) and TYZ4(124-22.5/32). As result, the FYT of 105-23 represents
(3*118-107)-(2*124-225). The price is rounded to the nearest tradable price. Many active traders are
familiar with this index pricing convention to create a time series.
Treasury Yield Curve Spread Tracker provides a means to create a continuous time series similar to
Treasury cash market spreads in terms of basis points. The chart below overlays the 3:2 FYT and OnThe-Run (OTR) basis point spreads since 2009. The OTR tenors are the 5-Yr and 7-Yr because their
remaining terms to maturity are closest to FV and TY.
Tracking Futures and Cash Yield Curve Spreads
FV (5-Yr)/TY (6 ½-10) FYT vs OTR 5yr/7yr
Cash 5 7
116
90
114
80
112
70
110
60
108
50
106
40
104
30
102
20
100
10
98
0
Cash Market Yld Sprd (Bps)
Futures Index
FYT
Data Sources: CME Group and Bloomberg
Notes:
Futures Index prices reflect (3*FV Daily Settlement Price of Nearby Expiry)-(2*TY Daily Settlement Price of Nearby
Expiry). Cash Market Yield Spread reflects 100*(OTR 7-Yr T-Note Daily Yield-OTR 5-Yr T-Note Daily Yield).
3
| Treasury Yield Curve Indexes | 30 October 2014
| © CME GROUP
Replicating Treasury Cash Market Yield Curve Exposure
Treasury futures yield curve spreads offer very efficient alternatives to express views of the Treasury cash
market yield curve. For example, the 5-Yr/30-Yr Treasury yield curve has flattened by 100 basis points
since November 2013. The closest Treasury futures tenors to the 5-Yr and 30-Yr OTR points are the 5-Yr
(FV) and the Ultra T-Bond (UB), which was launched in January 2010. The symbol for the FV/UB spread
is the FOL. The current FOL spread ratio is 5:1. The chart below overlays the FOL 5:1 and OTR 5-Yr/30Yr basis point spreads since 2010.
Tracking Futures and Cash Yield Curve Spreads
5-Yr/Ultra T-Bond & 5-Yr/30-Yr
Cash 5 30
480
350
470
300
Futures Index
250
460
200
450
150
440
100
430
50
420
0
Cash Market Yld Sprd (Bps)
FOL 5 1
Data Sources: CME Group and Bloomberg
Notes:
Futures Index prices reflect (5*FV Daily Settlement Price of Nearby Expiry)-(1*UB Daily Settlement Price of Nearby
Expiry). Cash Market Yield Spread reflects 100*(OTR 5-Yr T-Note Daily Yield-OTR 30-Yr T-Note Daily Yield).
Positioning for this yield curve flattening requires establishing a short position in the FV futures and a
similar DV01 position in UB futures. As a result, the FV has a weighting five times as large as the UB
position that is consistent with the ratio of DV01s for the FV and the UB futures. These positions can be
easily established by selling an FOL spread on CME CME Globex. Selling the FOL spread results in
similar exposure of being short five 5-Yr (FV) and long one Ultra T Bond (UB) for each spread traded.
The FOL index shows that this spread would have produced a net gain of more than $26,000 since
November 15, 2013.
4
| Treasury Yield Curve Indexes | 30 October 2014
| © CME GROUP
Next Steps
CME Group intends to explore modifying the pricing engine for Treasury futures yield curve spreads from
the current net change method to the index pricing method being used for the Treasury Yield Curve
Spread Tracker. The Exchange would value your feedback on which of these methods you prefer.
Please direct feedback on the current and proposed pricing methodology for Treasury Futures Yield
Curve Spreads on CME Globex to:
Products and Services
Agha Mirza
agha.mirza@cmegroup.com
+1 212 299 2833
Research & Development
Jonathan Kronstein
jonathan.kronstein@cmegroup.com
+1 312 930 3472
For more information about Treasury futures yield curve spreads, please visit cmegroup.com/ics.
5
| Treasury Yield Curve Indexes | 30 October 2014
| © CME GROUP
Disclaimer
Treasury futures are listed with, and subject to, the rules and regulations of CBOT.
The information within this presentation has been compiled by CME Group for general purposes only. CME Group assumes
no responsibility for any errors or omissions. Additionally, all examples in this presentation are hypothetical situations, used
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6
| Treasury Yield Curve Indexes | 30 October 2014
| © CME GROUP