CBOT Financial Futures T-bonds and T-Notes

Trading the Interest Rates Markets

It’s the glue. Interest rate markets bind and are tethered to every other financial asset class from stocks to currencies. The US Federal Reserve Bank and other central banks around the globe shape and push economic growth in the short and long term. Central bank moves can tighten or expand the amount of money circulating in an economy, which then impacts the value of a currency, which then affects the value of commodities and companies – across the globe.

So you can see the power the Fed has on US markets and beyond. Interest rate futures and options contracts may be used to hedge against risks that can adversely affect portfolios or balance sheets. Yet, they also provide trading and spreading opportunities across many different markets for traders and can be some of the deepest and most liquid futures markets in the world.

These markets are primarily event-driven , meaning participants are looking for opportunities and risks in every Fed meeting, announcement, Fed speech or testimony, not to mention key economic reports from employment rates to manufacturing data.. This allows traders to go long or short across the yield curve, from 3-month Eurodollar futures and up the line to 2-year, 5-year, 10-year notes along with 30-year Treasury bond futures and Ultra Treasury bond futures.

Traders and Investors who focus on financials will often hear three different terms relating to government bonds: Treasury bills, Treasury notes, and Treasury bonds.

There are two main differences between these three types of U.S. Treasuries, maturity dates and the way they pay interest.

Treasury note Futures: 

Treasury notes are issued with maturities of one, three, five, seven, and 10 years, while Treasury bonds (also called “long bonds” and “t-bond”) offer maturities of 20 and 30 years. The only difference between notes and bonds is the length until maturity. The 10-year is the most widely followed of all maturities; it is used as both the benchmark for the Treasury market and the basis for banks’ calculation of mortgage rates.

Treasury bond Futures:

Once T-notes and T-bonds are issued, their prices fluctuate so their yields remain linked to market prices. For example, say the government issues a 30-year bond with a yield of 10% when interest rates are high. In the next 15 years, prevailing rates fall significantly and new long bonds are being issued at 5%. Investors will no longer be able to buy the older T-bond and still receive a yield of 10%; instead, its yield to maturity will fall and its price will rise. In general, the longer the time there is until the bond matures the greater price fluctuation it will experience. In contrast, T-bills experience very little in the way of price fluctuation since they mature in such a short amount of time.

T Bond futures represent the 30-year maturity on interest rates, which help set rates on home mortgages, among other things.

Originally launched in 1977, this contract allows individual traders, banks and institutions to hedge long-term risk as well as profit from shifts in the interest rate markets.  The Federal Reserve Bank may have a stronger impact on shorter term rates with its policy moves, but that ripples down to the 30-year bonds as well.  Classic T-bond futures carry a remaining maturity of at least 15 years but not more than 25 years, which differ from Ultra T-bonds, which have a remaining maturity of at least 25 years but not more than 30 years.

30-year Treasury bond futures are among the most liquid and deep interest rate markets in the world, allowing traders efficient ways to enter and exit trades. The contracts are also available to trade virtually 24-hours per day.