CME Tries Again to Make Three-Year Treasury Futures a Thing

(Bloomberg) -- This time is different for U.S. Treasury three-year note futures, according to CME Group Inc.

The futures exchange giant that lists a suite of six Treasury note and bond contracts that are among the world's most-traded financial products said this week it's attempting to revive a seventh -- a three-year note contract that was launched in 2009 and, while not formally de-listed, stopped trading in 2010.

CME is making three changes to the terms of the contract to enhance its appeal, said Agha Mirza, global head of interest-rate products. But also, Mirza said, the U.S. government bond market has changed over the past decade in ways that favor the survival of the new version. Issuance has surged, and Treasury on Wednesday announced record auction sizes in the coming months to pay for economic-stimulus efforts amid the pandemic.

“The world changes, and especially from 2011 onwards” as balance-sheet optimization became a watchword for banks, “we found ourselves at a juncture where there were not just one or two, but multiple reasons why some of our clients are interested in us reintroducing the product in a way that's relevant to today's market,” Mirza said.

The Treasury market's growth has helped drive increased usage of futures for risk management and hedging, Mirza said. At $17.2 trillion, the market is already more than twice as large as it was a decade ago.

Market Evolution

The futures market has grown even faster because of the balance-sheet efficiencies it offers, Mirza said. Volume in Treasury futures has tripled since 2009, and open-interest has increased fourfold, he said. That's driven an increase in demand for additional contracts investors can use to hedge risk at various points along the curve.

When the legacy three-year contract debuted in 2009, there were four Treasury contracts, for the two-, five- and 10-year notes and the 30-year bond. Now there are two more -- the Ultra 10-year and the Ultra Bond, which reference longer-maturity baskets of deliverable securities than the “classic” versions.

Balance-sheet considerations that became more important after the financial crisis initially benefited the longer-term contracts most, Mirza said. In the past two years, however, the two- and five-year contracts have become CME's fastest-growing Treasury products, he said.

The changes CME is making to the three-year contract, which will take effect July 13 pending regulatory review, are as follows:

Expanding its deliverable basket to include old seven-year notes -- which the Treasury resumed issuing in 2009 after a 15-year hiatus. As a result, there will be 12 securities in the basket worth a combined $432 billion, up from eight worth a combined $319 billion. The larger size can support more growth in open interest, Mirza said.
Halving the minimum price increment for the contract to one-eighth of one-32nd of a price point, to match a change that was made to the two-year contract in January 2019. While the move drew grumbles from speculators who say it's made the market less liquid, CME says it cut trading costs and increased usage of the contract relative to the other Treasury products.
The third change affects the contract's trade matching algorithm on Globex, CME's electronic platform.

Mirza said the revamped three-year contract is “a similar story” to what happened when CME tried more than once to introduce a contract similar to the Ultra 10-year before finally gaining traction with that product, whose open interest briefly topped 1 million this year.