Jim Iuorio, for CME Group
AT A GLANCE
- The influence of the treasury market and the trend toward self-directed trading meet with arrival of Micro Treasury futures
- Smaller futures contracts could open the door to hedging strategies for traders in equity, foreign exchange or gold markets
U.S. treasuries are, by far, the largest and most liquid market in the world. In 2020, U.S. treasuries traded over $600 billion in value per day, well above the $450 billion traded in the U.S. stock market. This number is independent of the enormous notional amounts that trade in futures and other interest rates derivative products. The point is that the reach of the treasury market is massive.
Now, combine this fact with one of the most significant shifts we’ve seen in the trading world over the last two years: the growing involvement of the retail trader/investor who is taking a much larger role in managing their own finances and investments. Treasuries are a natural fit for the trader looking for choice in their trading approach.
Up until this point most treasury products were geared toward institutional use. New Micro Treasury futures will open the door for the retail trader and add flexibility for this growing group.
Launched officially Sunday night, August 15, these contracts will have maturities of 2, 5, 10 and 30 years and will be priced in yield terms as opposed to normal treasury futures which trade inversely to yield. Each contract will have a tic value of $10 per basis point. For comparison, one basis point move today in the CME 10-Year treasury “big contract” is approximately $83.
Why is it important for the retail trader to be plugged into the treasury market? Here are a few key reasons:
Money moves to the deepest, most liquid market
For decades sophisticated market participants have looked to treasuries as the best and fastest interpreter of rapidly breaking macroeconomic data. It stands to reason that money will reflexively move toward the deepest and most liquid market at the first sign of a change in the economic landscape. The bigger the headline, the greater the need for market liquidity and depth. Consequently, the treasury market is viewed as the leader of market moves while other markets and asset prices tend to follow.
More ways to complement trading strategies
The introduction of treasury futures at a smaller size will open up varied opportunities for pairs trades and risk hedges to complement current common trading strategies. Risk assets, like equities, have a complex relationship with rates. Sharp, short-term moves lower in interest rates tend to scare risk assets like stocks if the belief is that some unseen economic stress is causing money to seek safety quickly. Over time though, low interest rates that are slowly grinding lower tend to favor stock prices on a relative yield and potential growth basis.
Foreign currency fluctuations will happen
Foreign currency price fluctuations are also heavily influenced by interest rates. When U.S. rates are high relative to foreign rates, global money tends to buy U.S. dollars and, in turn, use them to invest in treasuries. Higher rates also tend to be indicative of a healthy economy and usually coincide with increased foreign investments. These foreign investors also need to buy dollars to take advantage of strong U.S. businesses, real estate, etc.
Gold has a close relationship with rates
Gold and precious metals are also not insulated from movements in rates. In moments of high economic distress money has historically moved to gold, U.S. dollars and U.S. treasuries. This effect is magnified in the metals market due to a declining disincentive to hold gold relative to treasuries. In simpler terms, gold’s yield, which of course is zero, looks better when U.S. rates are low. Conversely, in periods of higher rates, holding gold becomes relatively more expensive and tends to weigh on its price.
For someone who’s been involved in rate trading for 35 years, it’s probably no surprise that I view most assets from a rate-centric lens. All assets that are denominated in dollars have some relationship to U.S. rates. Going forward Micro Treasury futures could provide a valuable window for the retail world that was previously only open to institutions.