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10-Year T-Note vs. 10-Year Yield Futures: Which One To Trade?Introduction: The 10-Year T-Note Futures and 10-Year Yield Futures are two prominent instruments in the financial markets, offering traders unique opportunities to capitalize on interest rate movements. This video compares these two products, focusing on their key characteristics, liquidity, and the differences in point and tick values, ultimately helping you decide which one to trade. Key Characteristics: 10-Year T-Note Futures represent a contract based on the value of U.S. Treasury notes with a 10-year maturity, while 10-Year Yield Futures are based on the yield of these notes. The T-Note Futures contract size is $100,000, while the 10-Year Yield Futures contract size is based on $1,000 per index point, reflecting a $10 DV01 (dollar value of a one basis point move). Liquidity Comparison: Both 10-Year T-Note Futures and 10-Year Yield Futures are highly liquid, with substantial daily trading volumes and open interest. This high liquidity ensures tight spreads and efficient trade execution, providing traders with confidence in entering and exiting positions in both markets. Point and Tick Values: Understanding the point and tick values is crucial for effective trading. For 10-Year T-Note Futures, each tick is 1/32nd of a point, worth $31.25 per contract. The 10-Year Yield Futures have a tick value of 0.001 percent, worth $1.00 per contract. These values influence trading costs and profit potential differently and are essential for precise strategy formulation. Margin Information: The initial margin requirement for 10-Year T-Note Futures typically ranges around $1,500 per contract, while the maintenance margin is slightly lower. For 10-Year Yield Futures, the initial margin is approximately $500 per contract, reflecting its lower notional value and DV01. Maintenance margins for yield futures are also marginally lower, providing traders with flexible capital management options. Trade Execution: We demonstrate planning and placing a bracket order for both products. Using TradingView charts, we set up entry and exit points, showcasing how the different tick values and liquidity levels impact trade execution and potential outcomes. Risk Management: Effective risk management is vital when trading futures. Utilizing stop-loss orders and hedging techniques can mitigate potential losses. Avoiding undefined risk exposure and ensuring precise entries and exits help maintain a balanced risk-reward ratio, which is essential for long-term trading success. Conclusion: Both 10-Year T-Note Futures and 10-Year Yield Futures offer unique advantages. The choice depends on your trading strategy, risk tolerance, and market outlook. Watch the full video for a detailed analysis and insights on leveraging these products in your trading endeavors. When charting futures, the data provided could be delayed. Traders working with the ticker symbols discussed in this idea may prefer to use CME Group real-time data plan on TradingView: www.tradingview.com This consideration is particularly important for shorter-term traders, whereas it may be less critical for those focused on longer-term trading strategies. General Disclaimer: The trade ideas presented herein are solely for illustrative purposes forming a part of a case study intended to demonstrate key principles in risk management within the context of the specific market scenarios discussed. These ideas are not to be interpreted as investment recommendations or financial advice. They do not endorse or promote any specific trading strategies, financial products, or services. The information provided is based on data believed to be reliable; however, its accuracy or completeness cannot be guaranteed. Trading in financial markets involves risks, including the potential loss of principal. Each individual should conduct their own research and consult with professional financial advisors before making any investment decisions. The author or publisher of this content bears no responsibility for any actions taken based on the information provided or for any resultant financial or other losses.
Editors' picks
CBOT_MINI:10Y1!Education
by traddictiv
4
3 Month Bill Drops To 5.3%In this video, it was difficult to explain everything -- The first thing we look at is the 3-month bill the price of this bond -- Is set to drop as of this writing Later the price will be baked into the market -- In about 4 days from now This is very important to understand -- Because the financial market is backed by Bonds -- Once you understand bonds then you will learn How you can well profit from this type of market psychology -- Watch this video to learn more -- Disclaimer: Do not buy or sell what i tell you to buy or sell do your own research before you trade This is not financial advice -- To learn more about this topic rocket boost this article
TVC:US05YEducation
by lubosi
Harvesting Risk Hedged Treasury YieldEver heard of risk-free rates? Risk free rates are commonly understood to refer to interest rates on 10-year US treasuries. These are considered risk-free as the likelihood of the US government defaulting is considered extremely unlikely. Treasuries pay out a fixed interest and can be redeemed for their face value at maturity. Fixed returns and negligible default risk make treasuries a critical addition to any decent investment portfolio. With inflation on the downtrend and Fed’s hiking cycle nearing its apex, long term treasuries provide a fixed income-generating asset with no reinvestment risk. Little default risk does not mean zero market risk. As highlighted in our previous paper , bond prices are materially exposed to interest rate risk. CME Group’s treasury futures allow investors to hedge that risk. This paper has been split into two parts – the first provides an overview of treasury futures and their nuances while the second walks through the trade setup required to harness risk-hedged yield. TREASURY FUTURES Treasury futures enable investors to express views on a bond’s future price movement. Investors can also hedge against interest rate risk by locking in a coupon rate. CME treasury futures are deliverable with eligible treasury securities which ensures price integrity. QUOTING Treasuries are quoted in fractional notation as a percent of their par value. For instance, a bond quoted at 111’272 suggests that it is trading 11 + 27.2/32 (11.85%) above its par value. This allows standardized quotation of bonds with different coupon rates. Note that notion of quotes in cash markets may be different from futures. AUCTION SCHEDULE Treasuries are auctioned periodically depending on their maturity duration. • Treasury Bills with maturity between 4 to 26 weeks are auctioned every week while T-Bills with maturity of 1-year are auctioned every four weeks. • Treasury Notes with maturity of 2, 3, 5, and 7 years are auctioned every month while T-Notes with maturity of 10-years are auctioned every quarter. • Treasury Bonds are auctioned every quarter. The auctions for each type of security are staggered to reduce their market impact. CONVERSION FACTOR It is possible for a large range of “eligible” treasuries to be available for deliveries against standardised futures contract as new treasuries are regularly auctioned at changing rates. The most recently auctioned securities that are eligible for delivery are called “on the run” securities. To standardize the delivery process for varying securities, a conversion factor unique to each bond is used. The buyer of the futures contract would pay the Principal Invoice Price to the seller. The Principal Invoice Price is the “Clean Price” of the security and is calculated by applying the Conversion Factor to the settlement price. When the Conversion Factor is less than 1, the buyer pays less than the settlement price and when it is higher than 1 the buyer pays more. ACCRUED INTEREST In addition to the adjustment for the quality of the bond being delivered, the buyer must also compensate the seller for any interest the bond would accrue between the last payment and the settlement date. The final cost to deliver the treasury futures contract would be the Clean Price + Accrued Interest. CHEAPEST TO DELIVER Due to the Conversion Factor, which is unique to each bond, some bonds appear to stand out as cheaper alternative for the seller to deliver. So, if a seller has multiple treasury securities, a rational seller will choose to deliver the one that best optimizes the Principal Invoice Price. As a result, futures price most closely tracks the Cheapest-to-Deliver ("CTD”) securities. This also provides an arbitrage opportunity for basis traders. In this case, the basis is the relationship between the cash price of the security and its clean price on the futures market. Small discrepancies in these may be profited upon. Notably, specialized contracts such as CME Ultra 10-year Treasury Note futures with selective eligibility requirements diminish the effects of CTD by reducing the range of deliverable treasuries. HEDGING BOND PRICE RISK WITH TREASURY FUTURES Treasury securities are a crucial and substantial addition to any well diversified portfolio, offering income generation, diversification, and safety. With interest rates elevated and inflation heading lower, coupon rates for long-term US treasuries are yielding positive real returns. Moreover, 10Y yield is hovering at its highest level in 13-years suggesting a strong entry point. Since the coupon rate of the security is fixed and they can be redeemed at face value upon maturity, the present higher yielding treasuries are a great long-term income generating investment. Despite the inverted yield curve, which suggests yields on longer-term securities are lower, a position in long-term bonds protects against reinvestment risk. Reinvestment risk refers to the risk that when the bond matures, rates may be lower. With Fed at the apex of its hiking cycle, rates will likely not go any higher. So, a position in long term T-bond, locked in at the current decade-high rates, offers a lucrative opportunity. The position also benefits in the uncertain scenario of a recession as bond prices rise during recessions. This investment fundamentally represents a long treasury bond position which profits in two ways: (a) Rising bond prices when interest rates decline, and (b) Coupon payments. If the coupon payout is unimportant, fluctuations in the bond price can be profited upon in a margin efficient manner using CME futures. This does not require owning treasuries as the majority of the treasury futures are cash settled with just 5% reaching delivery. In the fixed income case, the bond is held until maturity which leads to opportunity costs from bond price fluctuations. CME futures can be used to harvest a fixed yield from treasuries and remain agnostic to rate changes, by hedging the long treasury position with a short treasury futures position. This position is directionally neutral as losses on one of the legs are offset by profits on the other. The payoff can be improved by entering the short leg after bond prices are higher. To hedge treasury exposure using CME futures the Basis Point Value (BPV) needs to be calculated. BPV, also known as DV01, measures the dollar value of a one basis point (0.01%) change in bond yield. BPV depends upon the bond’s yield to maturity, coupon rate, credit rating and face value. Notably, BPV for longer maturity bonds is higher as their future cashflows are affected more by changes in yield. Another commonly used term is modified duration which determines the changes in a bond’s duration or price basis of a 1% change in yield. Importantly, the modified duration of the bond is lower than 100 BPV’s since the bond price relationship to yield is non-linear. BPV can be calculated by averaging the absolute change in the bond’s yield-to-maturity, its value when held until maturity, from a 0.01% increase and decrease in yield. Where there are multiple bonds in a portfolio, the BPV for a unit exposure will have to be multiplied by the number of units. On the futures side, BPV can be calculated as the BPV of the cheapest to deliver security for that contract divided by its conversion factor. By matching the BPV’s on both legs, the hedge ratio can be calculated. This represents the number of contracts needed to entirely hedge the cash position. SUMMARY OVERVIEW OF CME TREASURY FUTURES CME suite of treasury futures allow investors to gain exposure to treasury securities across a range of expiries in a deeply liquid market. Each futures contract provides exposure to face value of USD 100,000. The 2-Year, 5-Year, and 10-Year contract are particularly liquid. Micro Treasury Futures are more intuitive as they are quoted in yields and are cash settled. Each basis point change in yield represents a USD 10 change in notional value. These products reference yields of on-the-run treasuries and settled daily to BrokerTec US Treasury benchmarks ensuring price integrity and consistency. Micro Treasury Futures are available for 2Y, 5Y, 10Y, and 30Y maturities enabling traders to take positions across the yield curve with low margin requirements. TRADE SETUP TO HARVEST RISK HEDGED TREASURY YIELDS A long position in the on-the-run 10Y treasury notes and a short position in CME Ultra 10Y futures allows investors to benefit from the treasury bond’s high coupon payment while remaining hedged against interest rate risk. Hedge ratios can be calculated using analytical information from CME’s Treasury Analytics Tool to obtain the BPV of each of the legs: The on-the-run treasury pays a coupon rate of 3.375% pa. and its last quoted cash price was USD 98.04. It has a DV01 of USD 76.8. Since, each contract of CME Treasury Futures represents face value of USD 100,000, the long-treasury position would need to be in multiples of USD 100,000. For a face value of USD 500,000 (USD 100,000 x 5) this represents a notional value of USD 490,000 (Face Value x Cash Price) . The long-treasury position's DV01 = USD 76.8 x 5 = USD 385. The cheapest-to-deliver security has a DV01 of USD 92.2 and a conversion factor of 0.8244. The futures leg thus has a BPV = Cash DV01/Conversion Factor = USD 92.2/0.8244 = USD 111.8. The hedge ratio = BPV of Long Treasury/BPV of Short Futures = USD 385/USD 111 = ~4 (3.4) So, four (4) lots of futures would be required to hedge the cash position which would require a margin of USD 2,800 x 4 = USD 11,200. Though the notional on the two legs does not match, the position is hedged against interest rate risk and pays out 3.375% per annum in coupon payments. MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
TVC:US10YEducation
by mintdotfinance
1
Inflation & Interest Rate Series – Below 5.3% is Crucial for CPIContent: • Why CPI must be below 5.3%? • Can we invest or trade or hedge into inflation? Disclaimer: • What presented here is not a recommendation, please consult your licensed broker. • Our mission is to create lateral thinking skills for every investor and trader, knowing when to take a calculated risk with market uncertainty and a bolder risk when opportunity arises. Stay tuned for our next episode in this series, we will discuss more on the insight of inflation and rising interest rates. More importantly, how to use this knowledge, turning it to our advantage in these challenging times for all of us. Micro 5-Year Yield Futures 1/10 of 1bp = US$1 or 0.001% = US$1 3.000% to 3.050% = US$50 3.000% to 4.000% = US$1,000 See below ideas on the previous videos for this series.
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CBOT_MINI:5YYU2022Education
by konhow
4
The Link Between Inflation, Rising Bond Yield, & Market Sell-offAggravated by Jerome Powell's speech at the Wall Street Journal Jobs Summit, the tech-led sell-off continues, causing the Dow Jones Industrial Average to fall by 1.11%, S&P 500 by 1.34%, and Nasdaq Composite by 2.11%. On that note, the 10-year Treasury yield also popped to 1.541% during Jerome Powell's speech, later closing at that level for the day. But how, specifically, did Jerome Powell cause the market to sell-off yesterday? Let's find out. Prior to Jerome Powell's speech, there were already a substantial amount of tension surrounding the bond market and concerns regarding inflation. A key event occurring recently that brought a great deal of attention to the acceleration of rising bond yields were the sudden spike in 10-year Treasury yield back in 2/25/21 from 1.38% to 1.54% - temporarily jumping as high as 1.6%, when an auction of US$62 billion 7-year notes was met with weak demand. This rattled the stock market because investors were not ready for the velocity of the 10-year Treasury yield surge. Instead, they were expecting for yields to gradually inch higher throughout the year. In an effort to pinpoint the exact reason for the surge, many conclusions were drawn. One of which relates to inflation concerns. Over the course of the pandemic, trillions in fiscal relief has been delivered, of which an addition $1.9 trillion in fiscal package is expected to come from the Biden Administration. With so much money printed and nowhere to flow yet due to economic lockdown as a result of the pandemic, investors fear that once the economy reopens again, pent-up demand will drive people to go on vacation and spend in masses, injecting all the printed money over the course of the pandemic into the economy all at once, driving inflation up at a rate that has not been seen since the 2008 Financial Crisis. Due to this belief of a looming inflation, it makes bond that are purchased currently potentially worthless because of possible subpar yield. As a result, people flock away from bonds at the moment because they are expecting that yields will rise going forward in order to compensate for inflation risk. Thus, yields are continuously being driven up. However, with the sudden spike in yield, it creates uncertainty around whether we will be seeing an acceleration of rising bond yields and possibly indicate that inflation could be around the corner. The possibility of this scenario is further amplified by vaccination efforts contributing to a recovering U.S. economy, and the incoming $1.9 trillion fiscal package that could further inflate the economy going forward while pushing the economy further into the recovery. Taking all of this into account, let's go back to Jerome Powell's speech. Having understood all of these, investors were looking at Jerome Powell to see whether he would give any indication on how he plan to control the acceleration of the rising bond yield, perhaps through an adjustment of the Fed's asset purchase program, where they will step up on the purchasing of long-term bonds to drive down long-term interest rates, or even extending the Supplementary Leverage Ratio that will be expiring on 3/31/21, so that banks can further help with the purchase of long-term bonds. However, in his speech, Jerome Powell said nothing of the sort, in which the market took as a signal that yields could rise further, triggering the sell-off even further, and driving the 10-year Treasury yield further up to a level that matches the initial 10-year Treasury yield spike back in 2/25/21. In fact, Jerome Powell made supposedly positive remarks stating that he expects the rise in inflation as the economy recovers to only be temporary, that he does not expect the move up in price to be long-lasting nor does he expect it to be enough to change the Fed's accommodative monetary policy, among others. With the market sell-off and surge in yield during his speech, it is clear that the market neither believes his words nor views it positively. To conclude, we are now in a very volatile situation where stocks no longer just goes up. We cannot control the direction of the market, but what we can control is how we deal with this situation emotionally and monetarily. Don't get too hung up on the short-term bearishness of the current market condition because if you zoom out your chart, in the grand scheme of things, this is just a tiny bleep. As such, if you believe that we will eventually recover from this market sell-off, use this as an opportunity to buy into your favorite companies at a huge discount. Invest safe. This is not investment advice so please do your own due diligence! Support this idea with likes and share your thoughts below.
TVC:US10YEducation
by AntrePoint