What Are Treasury Bond Futures?

Bond futures are financial derivatives in which the contract holder is obligated to buy or sell a Treasury bond on a specified date at a presently agreed price. They are standardized financial products that trade on the futures exchange market, with the prices and settlement dates determined at the time the futures contracts are purchased.

At the expiration of a contract, the seller of the bond futures contract delivers a Treasury bond that satisfies the contract terms — in maturity range and interest rate. Thus, a seller is at liberty to deliver the cheapest qualifying Treasury bond.

The 30-year Treasury bond futures are the most traded Treasury bond contracts on the futures market, and it serves as an important benchmark by which other long-term securities are measured.

Why Trade the 30-year Treasury Bond Futures

Traders play the bond futures market for the following reasons:

Hedging: The 30-year T-bond futures are usually used as risk management tools by bond investors and fund managers to protect their portfolio

Speculating: Bond futures traders use the 30-year Treasury bond futures to speculate on the long-term direction of interest rates.

Arbitrage trading: Arbitrage traders simultaneously buy and sell the contract on different platforms to benefit from any imbalance in prices.

How the 30-year Treasury Bond Futures Trade

The 30-year Treasury bond futures contract was introduced on the Chicago Board of Trade (CBOT) in 1977, and it traded via the open outcry system. In 2007, the CBOT became a member of the Chicago Mercantile Exchange (CME) Group, and traders could trade the contract from any part of the world — even outside the regular market hours — through the CME Globex electronic trading platform.

However, in March 2011, the CME Group split the 30-year U.S. Treasury bond futures into two bond futures:

• the CME Group U.S. Treasury Bond (US or ZB), which has a remaining term to maturity of at least 15 years but less than 25 years from the first day of the delivery month
• the CME Group Ultra U.S. Treasury Bond (UB or UL), with a remaining term to maturity of more than 25 years from the first day of delivery month

A unit of either of the 30-year T-bond contract represents one U.S. Treasury note with a face value at maturity of $100,000, and the price quotation is in points ($1,000) and 1/32 of a point. The minimum price fluctuation is 1/32 of one point (equivalent to $31.25) per contract, except for inter-month spreads for which the minimum price fluctuation shall be one-quarter of one thirty-second of one point (equal to $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 transfer of a qualifying U.S. Treasury bond, in accordance with the terms of the contract. The last delivery day is the last business day of the delivery month.

All you need to start trading Treasury bond futures 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 you can make more money, you can also lose more.

30-Year Treasury Bonds Trading Strategies

The 30-year US treasury bond futures market is a great market for finding trading strategies. We trade it quite a lot ourselves and find it particularly easy to find trading strategies that go long. This is nothing strange, considering that the bond markets have been in a positive trend for quite some time.

While this might be very beneficial to long trading strategies, you really want to make sure that you have a trading strategy that also manages to short the market, in case the long term 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!

30-year Treasury Bond Futures Seasonality

Here is a seasonal chart of the US futures market:

Source

Factors That Affect the 30-year Treasury Bond Futures

Here are some of the factors that affect the yields and prices of the 30-year U.S. Treasury bond futures:

Economic condition: A booming economy presents investors with several investment options that have superior returns compared to Treasury yields. Investors, therefore, channel their funds to other assets with superior returns. As a result, there is a reduction in the demand for the 30-year Treasury bonds, and the prices fall. The yields increase as the prices fall until equilibrium in the demand and supply of Treasury bond is reached. The reverse happens when there is an economic recession.

Interest rates: When interest rates are falling, investors try to lock in their money at a specific interest rate of the previously issued Treasury bonds that are selling on the secondary market. This causes bond prices to rise. Conversely, when the interest rates are rising, investors move their money to where they can get better returns, thereby forcing Treasury bond prices down.

Inflation: Rising inflation makes fixed-income assets less desirable, forcing down the prices of Treasury bonds. On the other hand, when inflation is declining, Treasury bond prices tend to rise.

Political events: Investors use the U.S. Treasury bonds as a safe haven to protect their capital when there is a major political or social event that they believe is bad for the economy. So, Treasury bond prices go up when there is bad news. An example was the Brexit vote in June 2016, which pushed Treasury bond prices to all-time highs and the yields to all-time lows. Conversely, when political news or events are interpreted as being good to the economy, investors abandon Treasury bonds and invest in other products with better yields — the Trump’s election in November 2016 is an example.

Conclusion

The 30-year Treasury bond futures is actively traded on the CBOT and the CME Globex electronic platform. Traders and investors use it to speculate on the direction of interest rates and to hedge their portfolio.

Here is our archive with articles about other tradeable futures markets.

FAQ

How do 30-Year Treasury Bond Futures Trade?

The 30-year Treasury Bond Futures contract, introduced on the Chicago Board of Trade (CBOT), is now part of the Chicago Mercantile Exchange (CME) Group. It trades globally via the CME Globex electronic trading platform. The contract represents one U.S. Treasury note with a face value of $100,000 at maturity.

What is the Minimum Price Fluctuation in 30-Year Treasury Bond Futures?

The minimum price fluctuation is 1/32 of one point, equivalent to $31.25 per contract, except for inter-month spreads, where it is one-quarter of one thirty-second of one point, equal to $7.8125 per contract.

How Can I Start Trading Treasury Bond Futures?

To start trading Treasury bond futures, create an account with the exchange through a futures broker and deposit the required margin. As leveraged instruments, you don’t need the full dollar worth of the contract to start, but caution is advised.