How to trade US interest rates using the CME Group’s new Micro Treasury Yield futures contracts


This article on interest rate futures is the opinion of Optimus Futures.

The CME Group’s new Micro Treasury Yield Futures contracts offer an inexpensive way to participate in the treasury markets.

And it couldn’t come at a better time.

Treasury futures allow traders and investors a way to speculate and hedge their portfolios.

Yet, retail clients were left out of the mix until recently.

Micro Treasury Futures are an incredible development for retail traders. We now have flexible tools that allow us to hedge and speculate without the huge price swings of regular treasury contracts.

In the last decade, interest rate futures claimed a more critical role in the investment ecosphere.

Actions by the U.S. Federal Reserve and central banks around the world pumped trillions of dollars into debt markets, injecting volatility across the board.

With everyone holding their breath for the next taper tantrum or interest rate increase (or just a hint of either), it’s more critical than ever we incorporate all the tools available to us.

This article is designed to help you understand the what, why, and how of micro treasury futures.

And pay attention because there is KEY DIFFERENCE from current products.

How Yields Work

We wanted to start with a quick refresher on the relationship between bonds and yields.

‘Treasuries’ are debt instruments (AKA Bonds) issued by the U.S government. The names based on duration:

  • Bonds +10 Years
  • Notes 1-10 Years
  • Bills < 1 Year
For this article, we are only going to discuss fixed coupon treasuries or those debt instruments that pay a specific dollar amount at regular intervals.

That fixed dollar amount divided by the price of the treasury is called the yield.

As the price of the treasury changes, so does the yield…in the opposite direction.

Let’s use an example.

Our current 10-Year Treasury Note pays 1.25%. We’ll assume that the principal paid back to us at the end (IE par value) is $1,000.

That means we receive $12.50 for each 10-year Treasury we hold.

What happens if we pay $950 for that same $12.50 cash flow?

Our yield becomes $12.50 / $950 x 100 = 1.32%.

Interest rate futures - Treasury yields vs price

It’s also important to understand the relationship between time to maturity and yield.

Generally speaking, the longer a debt instrument has left, the higher the yield.

Think of it like this. If you were going to loan someone money, what interest would you charge them for 5 days vs 500 days?

That’s why a 2-Year Treasury Yield runs around 0.23% while the 10-Year Yield comes in closer to 1.25%.

You can see the relationship in the graph below.

Interest rate futures - US Treasury yields curves

Notice how the curve is generally upward sloping.

When it slopes downward, we get what’s known as an ‘inverted’ yield curve. Many traders use this as a signal of a potential equity market decline.

One last idea to consider.

The Federal Reserve controls interest rates through the Fed Funds Rate and debt purchases.

When they reduce those purchases and increase rates, the longer-dated maturities tend to move more in terms of total basis points than the short end.

What are Micro Treasury Yield Futures

We started with the refresher for a very important reason.

Micro Treasury Yield Futures track yields.

There are 4 different types available:

  • 2-Year Yield Futures – Symbol 2YY
  • 5-Year Yield Futures – Symbol 5YY
  • 10-Year Yield Futures – Symbol 10Y
  • 30-Year Yield Futures – Symbol 30Y
These are very different from trading futures based on the price of treasuries which most people are familiar with.

Right now, a 10-Year Treasury Note Futures (/ZN) price at $134’07.

These futures contracts track the actual price of a 10-Year Treasury note where each tick is measured in increments of 0’005.

Notice that Treasury prices are quoted in fractions of a dollar. Each of these movements is worth $15.625.

For treasury bond futures, the value of each tick is different for different maturities. For example, each tick in a 30-Year Treasury Future (/ZB)is worth $31.25.

The tick value for micro treasury yield futures remains the same across all products.

Treasury yield prices are quoted in increments of 0.001%. Each tick or minimum movement is worth $1.00. These ticks are measured in 0.001% increments.

Here’s an example.

I buy the 10-Year Treasury Yield micro future at 1.250%. Later that day, I sell my contract at a pride of 1.265%.

My profit is 1.265 – 1.250 x $1.00 = $15.00

Micro Treasury Futures Key Specifications

Let’s cover some details around interest rate futures contracts.

Trading Times

Like most futures products, treasury interest rates futures trade from [7:00] PM EST on Sunday through [5:00] PM EST on Friday with a one-hour break from [5:00] PM – [6:00] PM EST.

Price Limits

Although it’s rare, there are price move limits in micro treasury contracts. They can only move 20 basis points in a day, or 200 ticks.

Quantity Limits

Across all the micro treasury products, you can only own 10,000 contracts of any one of these products at a given time. However, you can add options on futures that change the limits on a net basis.

Settlement & Exercise

One important feature of these futures products is that they are cash-settled.

Cash-settled futures allow you to hold until expiration and then collect your profit or pay out your loss, unlike deliverable futures like oil where you are obligated to physically take ownership of the asset.

This is a key difference from the Treasury Note and Bond futures which are deliverable.

Maturity Months

Micro Treasurey Yield Futures have monthly contracts listed for two consecutive months. That differs from the quarterly contracts you would find in regular treasury futures.

Margin Requirements

One benefit of micro treasuries is the low margin requirements. While it differs between brokers, the CME lists maintenance margin at $175 per contract.

Click Here to view the day trading margins for Micro Treasury Futures from Optimus Futures.

How to Trade Interest Rate Futures

Trading interest rate futures isn’t all that different from other futures products. There are 7 key steps.

Step 1: Educate Yourself

Trading and investing are businesses like any other. Yet, few people give it the time it deserves.

Make sure you understand the concepts of trading and investing position management, and risk.

Check out our post on trade management for a comprehensive step-by-step guide.

Step 2: Pick a strategy

Trading interest rate futures fall into one of two camps: speculation or hedging.

Speculation trades aim to profit off moves you expect treasury yields.

Hedging uses futures contracts to offset exposure of a position or portfolio to treasury yields.

For example.

Let’s say you own a lot of financial companies in your investment portfolio. Many of these companies trade relative to interest rates. However, your investment thesis is based on some other factor such as lower loan defaults or a possible acquisition.

Using Micro Treasury Futures, you can offset exposure to interest rate risk against those holdings.

Important Note: Make sure the contract expiration aligns with your strategy. The last thing you want is to set up a strategy that takes six months only to find your futures contract expires next month.

Step 3: Identify Opportunities

Once you know how and why you want to use interest rate futures, you can begin to look for profitable trades and investments.

Scanning tools are a great way to narrow down your search, whether based on fundamentals or technical analysis.

Step 4: Choose Your Product and Month

Selecting the right product means choosing the right instrument and the right month.

For the right instrument, you need to decide which of the treasury yields you want to trade.

For the right month, keep in mind that nearer term months tend to have higher liquidity (trading volume) than ones further out.  If your strategy takes more than a few months, you’ll need to consider the costs of rolling your futures contract each month.

Step 5: Understand Margin Requirements

Like all futures products, micro treasury yields employ leverage.

Consequently, this uses margin or buying power.

There are two types to consider: the initial margin requirements you need to enter a trade and the maintenance requirements you need to hold a trade.

Initial margin requirements are often higher than maintenance requirements.

Step 6: Place Your Order

You can buy (bet for) or sell short (bet against) micro yield futures in your order. When volumes are lower, the spread between the bid and the ask will be wider.

Determine whether limit or market orders suit you best.

Step 7: Monitor Your Position

Using the strategy and plan you developed, monitor your positions at least once a day on your chosen platform.

Final thoughts

Optimus Futures offers Micro Treasury Yield futures contracts through CME Group as part of its ongoing expansion of micro futures products. Micro Treasury Yield futures will be available through the Optimus Flow desktop platform as well as through our vast selection of third-party apps.

Learn more about how to trade interest rates with Micro Treasury Yields futures by Clicking Here

Trading futures and options involve substantial risk of loss and are not suitable for all investors. Past performance is not necessarily indicative of future results.

CME Micro contracts generally have a value and margin requirement that is one-tenth (10%) of the corresponding regular contract.  The cost of trading Micro contracts is higher than regular contracts when measured as a percentage.  Commission rates are not always one-tenth of the rate for regular contracts. Exchange and NFA fees are not proportionately reduced.  Frequent trading of Micro contracts further compounds the cost disparity. Futures transactions are leveraged, and a relatively small market movement will have a proportionately larger impact on deposited funds.  This may result in frequent and substantial margin calls or account deficits that the owner is required to cover by depositing additional funds.  If you fail to meet any margin requirement, your position may be liquidated, and you will be responsible for any resulting loss. 

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