The U.S. Department of Treasury issues four basic types of debt instruments to finance the government’s expenditures. They are considered the safest debt securities in the world since they are backed by the U.S. government. Depending on the maturity and interest payment, the instruments can be classified as Treasury bills, Treasury notes, Treasury bonds, and Treasury inflation-protected securities (TIPS).
The 10-year U.S. Treasury note futures market contract (TY) is traded on the Chicago Board of Trade (CBOT), which is a member of the Chicago Mercantile Exchange (CME) Group — via the open outcry system from 7:20 am to 2:00 pm CT, Mondays to Fridays.
These U.S. Treasury debt instruments, especially the Treasury notes and bonds, are traded on the futures market. Technically, the 10-year U.S. Treasury debt is considered a Treasury note, but what exactly are Treasury notes?
|10-year U.S Treasury Futures Contract Specifications|
March, June, September, and December
CME Globex: Sunday – Friday: 5:00pm – 4:00pm CT// Open Outcry: Monday – Friday: 7:20am – 2:00pm CT
Through Federal Reserve book-entry wire-transfer system
Last Trading Day
Seventh business day before the last business day of the delivery month
What Is a Treasury Note?
A Treasury note (T-note) is a U.S. debt instrument, which has a fixed interest rate and matures between one and 10 years. The popular Treasury notes are the 2-year, 5-year, and 10-year notes which mature at two years, five years, and 10 years respectively. They are heavily traded on the secondary market.
The interest is fixed at the time of issuance, but because the note prices are constantly fluctuating, the yield or the rate of return (popularly known as the Treasury note rate) is constantly changing. The rates are inversely related to the prices. Interests on the notes are paid every six months until maturity, and the interest payments are not taxable on a municipal or state level but are taxed at the federal level.
Of all the Treasury notes, the 10-year Treasury note is seen as the most important, and the 10-year Treasury note futures are most actively traded in the futures market. Here is why:
- The yield of the 10-year Treasury note is closely monitored by investors as a proxy for mortgage rates.
- It is also seen as an indicator of investor sentiment about the economy — any basis point movement is a signal to the market
How the 10-Year Treasury Note Futures Contract Trades
The 10-year U.S. Treasury note futures contract (TY) is traded on the Chicago Board of Trade (CBOT), which is a member of the Chicago Mercantile Exchange (CME) Group — via the open outcry system from 7:20 am to 2:00 pm CT, Mondays to Fridays. On the CME Globex electronic trading platform, traders from different parts of the world can trade the contract (with ZN ticker symbol), even after the regular market hours.
A unit of the 10-year T-note contract represents one U.S. Treasury note with a face value at maturity of $100,000. The price quotation is in points ($1,000) and halves of 1/32 of a point. Par is on the basis of 100 points, and each point is equal to $1,000 per contract.
The minimum price fluctuation is one-half of one thirty-second of one point (equivalent to $15.625 per contract), except for inter-month spreads for which the minimum price fluctuation shall be one-quarter of one thirty-second of one point (or $7.8125 per contract).
Contract months are listed with the first five consecutive contracts in the March, June, September, and December quarterly cycle. The last trading day is the seventh business day preceding the last business day of the delivery month. On the last trading day, the contract stops trading at 12:01 pm.
Settlement is by delivery of the underlying asset — which is a U.S. Treasury note with a remaining term to maturity of at least six and a half years, but not more than 10 years, from the first day of the delivery month.
The invoice price is equal to the futures settlement price multiplied by a conversion factor and then added to the accrued interest. The conversion factor is the price of the delivered note ($1 par value) to yield 6 percent. The delivery method is via the Federal Reserve book-entry wire-transfer system, and the last delivery day is the last business day of the delivery month.
How to Start Trading 10-Year Treasury Note Futures
It doesn’t take much to start trading Treasury note futures; all you need is to create an account with the exchange through your futures broker and deposit the required margin. Futures are leveraged instruments, so you need not have the full dollar worth of the contract to start. Be cautious with leverage instruments though — while they can make you more money, they can also make you lose more.
10-Year Treasury Note Futures Trading Strategies
Just keep in mind that the treasury futures markets have experienced a long bullish trend for many years, which will make it easier to find strategies that go long. While you certainly should try to ride this trend, it’s also important to ensure that you have trading strategies that go short as well, in case the trend changes direction.
If you’re interested in getting inspiration for your own trading strategies, we recommend that you take a closer look at our edge membership!
10-Year Treasury Note Futures Seasonality
Here is a seasonal chart of the TY futures market:
Factors That Affect the 10-Year Treasury Note Futures
Economic condition: When the economy is booming, investors have lots of investment options that have superior returns compared to Treasury yields, so they tend to move their funds away from Treasuries to invest in other assets. The result is a reduction in the demand for the 10-year Treasury notes, leading to a fall in price. As Treasury prices fall, the yields will increase until there is an equilibrium in the demand and supply of the Treasury note. The reverse happens when there is an economic recession.
Interest rates: Falling interest rates creates additional demand for Treasury notes, especially the 10-year T-notes, as investors try to lock in their money at a specific interest rate. This additional demand pushes the prices up. Conversely, when the interest rates are rising, investors move their money to where they can get better returns, thereby forcing Treasury note prices down.
Inflation: Rising inflation makes fixed-income assets less desirable, forcing down the prices of Treasury notes. When inflation is declining, Treasury note prices tend to rise.
Political News/Events: If there is a major political event, which investors believe is bad for the economy, Treasury note prices go up since investors see the asset as a safe haven to protect their capital. An example was the Brexit vote in June 2016, which pushed Treasury note prices to all-time highs and the yields to all-time lows. When political news or events are interpreted as being good to the economy, Treasury note prices decline and yields go up, as investors abandon the safety offered by Treasury notes in search of products that offer more attractive yields — for example, Trump’s election in November 2016.
What is a 10-year Treasury bond future and how does it differ from other bond futures?
A 10-year Treasury bond future is a financial derivative that allows traders to speculate on or hedge against the future value of 10-year U.S. Treasury bonds. It is a standardized contract that is traded on a futures exchange, with the contract size representing a certain amount of 10-year Treasury bonds. Like other bond futures, the price of a 10-year Treasury bond future is based on the underlying bond’s value, but the contract allows traders to buy or sell the bond at a predetermined price on a future date, without actually owning the bond itself.
What are some common trading strategies used for 10-year Treasury bond futures?
Some common trading strategies used for 10-year Treasury bond futures include:
- Speculating on interest rate movements: Traders may buy 10-year Treasury bond futures if they expect interest rates to rise, or sell them if they expect rates to fall.
- Hedging against interest rate risk: Investors who hold long-term bonds may use 10-year Treasury bond futures to hedge against the risk of rising interest rates, which can decrease the value of their bond holdings.
- Spread trading: Traders may also use 10-year Treasury bond futures in combination with other bond futures to take advantage of price differentials between the contracts, known as spread trading.
How can a trader use 10-year Treasury bond futures to hedge against interest rate risk?
A trader can use 10-year Treasury bond futures to hedge against interest rate risk by taking an opposing position in the futures market to their bond holdings. For example, if a trader holds a long position in 10-year Treasury bonds, they may sell 10-year Treasury bond futures to offset the risk of rising interest rates, which can decrease the value of their bond holdings. Similarly, if a trader holds a short position in 10-year Treasury bonds, they may buy 10-year Treasury bond futures to hedge against the risk of falling interest rates, which can increase the value of their bond holdings.
What are some factors that can influence the price of 10-year Treasury bond futures?
Some factors that can influence the price of 10-year Treasury bond futures include:
- Interest rates: Changes in interest rates can affect the value of 10-year Treasury bonds and therefore the price of 10-year Treasury bond futures.
- Inflation expectations: Inflation expectations can also impact the price of 10-year Treasury bond futures, as investors may demand higher yields on bonds to compensate for the expected erosion of purchasing power.
- Market supply and demand: The supply and demand for 10-year Treasury bonds and 10-year Treasury bond futures can also influence their price.
How can technical analysis be applied to 10-year Treasury bond futures trading?
Technical analysis is a method of evaluating securities by analyzing statistical trends and patterns in the market data, such as past price movements and volume. It can be applied to 10-year Treasury bond futures trading by looking at chart patterns, trends, and indicators such as moving averages and relative strength index. Traders may use technical analysis to identify entry and exit points, as well as to set stop-loss and profit-taking orders.
What is the role of fundamental analysis in trading 10-year Treasury bond futures?
Fundamental analysis is a method of evaluating securities by analyzing the underlying economic and financial factors that can impact their value. In the case of 10-year Treasury bond futures, fundamental analysis may involve studying economic indicators such as gross domestic product (GDP), employment data, and inflation to understand the outlook for interest rates
How can a trader use options on 10-year Treasury bond futures to enhance their trading strategy?
Options are financial derivatives that give the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price on or before a certain date. A trader can use options on 10-year Treasury bond futures to enhance their trading strategy by adding options positions to their futures positions to potentially increase their profits or limit their losses. For example, a trader who is long 10-year Treasury bond futures may buy call options on the futures to potentially profit from further price increases, or they may sell put options to generate additional income while still holding the long position.
What are some risks associated with trading 10-year Treasury bond futures and how can they be managed?
Some risks associated with trading 10-year Treasury bond futures include:
- Market risk: The price of 10-year Treasury bond futures can be affected by a range of factors, including changes in interest rates, inflation expectations, and market supply and demand, which can lead to price fluctuations.
- Credit risk: 10-year Treasury bonds are considered to be low-risk investments, but there is still a risk that the issuer may default on its obligations. This risk is typically passed on to traders of 10-year Treasury bond futures.
- Liquidity risk: The liquidity of 10-year Treasury bond futures may vary depending on the time of day and market conditions. Traders may face difficulty in entering or exiting positions in low liquidity environments, which can lead to wider spreads and increased costs.
To manage these risks, traders can use risk management techniques such as setting stop-loss orders and using options to limit their potential losses. They can also diversify their portfolio by trading a range of securities, including other bond futures, to reduce the impact of any single position.
How does the contract size for 10-year Treasury bond futures compare to other bond futures?
The contract size for 10-year Treasury bond futures is typically larger than for other bond futures, with a contract representing a face value of $100,000. In comparison, the contract size for 30-year Treasury bond futures is also $100,000, while the contract size for 2-year Treasury note futures is $200,000.
Are there any unique tax considerations for traders of 10-year Treasury bond futures?
Traders of 10-year Treasury bond futures may be subject to different tax treatment depending on their individual circumstances and the tax laws of their jurisdiction. In general, profits from futures trading may be taxed as capital gains or as ordinary income, depending on the holding period and the trader’s classification as a “trader” or “investor” for tax purposes. It is recommended that traders seek advice from a tax professional to understand their specific tax obligations and to ensure that they are properly reporting their gains and losses.
The 10-year Treasury note futures is a futures contract for the delivery of a U.S. Treasury note with a remaining term to maturity of at least six and a half years but not more than 10 years. It is offered on the CBOT and the Globex electronic platform.
Here is our archive with articles about other tradeable futures markets.