What is the 5-year T-Note futures?

The T-Note futures is an interest rate futures contract in which the underlying asset is a Treasury note with the specified maturity period and interest rate. Interest rate futures are financial derivative contracts in which, on contract expiration, the contract holder is obligated to buy or sell the specified government debt instrument at an already agreed price.

So, at the expiration of the contract, the contract holder is required to deliver or take delivery of a qualifying T-Note. A qualifying T-Note for the 5-year T-Note futures is one whose original term to maturity is not more than five years and three months and the remaining term to maturity is not less than four years and two months as of the first day of the delivery month.

Why trade 5-year T-Note futures?

There are many reasons to participate in the 5-year T-Note futures market, and these are some of them:

Speculation: Traders use it to speculate on the short-term direction of the Fed’s interest rates. The market is liquid and volatile enough for speculative traders to try and benefit from price fluctuations.

Hedging: The U.S. debt instruments are seen as the safest securities on the planet. They are usually used as risk management tools by investors and fund managers to protect their portfolio in times of financial market crisis.

Portfolio diversification: Investors can use the 5-year T-Note futures to diversify their investment portfolio into the treasury market.

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

5- Year T-Note Seasonality

Here is a seasonal chart of the market:

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How does the 5-year T-Note future trade?

The 5-year T-Note futures contract (ZF) is traded on the Chicago Mercantile Exchange (CME) Group’s Globex electronic trading platform, Sunday to Friday from 5:00 p.m. to 4:00 p.m. Central Time (CT) the next day.

One unit of the 5-year T-Note contract is equivalent to one U.S. Treasury note with a face value at maturity of $100,000. The price quotation is in points and fractions of points. Par shall be on the basis of 100 points, and each point is equal to $1,000 per contract. The minimum price fluctuation is one-quarter of one thirty-second of one point (equivalent to $7.8125, rounded to the nearest cent per contract), including inter-month spreads.

There are contracts listed for the first three consecutive months in the March, June, September, and December quarterly cycle. The last trading day for the expiring contract is the last business day of the calendar month, and on that day, trading in expiring contracts terminates at 12:01 pm.

The settlement is by delivery of the underlying asset — which is a U.S. Treasury note with an original term to maturity of not more than five years and three months and a remaining term to maturity of not less than four years and two months as of 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. Note that the conversion factor is the price of the delivered note ($1 par value) to yield 6 percent. The delivery procedure is via the Federal Reserve book-entry wire-transfer system, and the last delivery day is the third business day following the last trading day.

If you wish to start trading the 5-year T-Note futures, all you need is to create an account with the exchange through a 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 quick money, you can lose more than you invested.

FV/ ZF Trading Strategies

Finding a trading strategy for the FV/ZF futures market is a good way to achieve diversification away from the more common equity index futures. In general, you want to trade strategies on many markets and timeframes to achieve better diversification.

In the image above you see a trading strategy for the 5-year T-note futures market that we have traded for quite a while now. If you just put in the effort, it certainly is possible to build great trading strategies for this market.

If you’re interested in getting edges for many futures and ETF markets, we recommend that you have a look at our unique edge membership. Members get new edges every month sent right to their inbox.

Factors that affect 5-year T-Note futures

There are many factors that can affect treasury yields and the pricing of the 5-year T-Note futures:

The prevailing economic condition: When the economy is booming, there are lots of investment options that have better returns than the U.S. Treasury yields, so investors tend to move their funds to assets with superior returns. As a result, there will be a reduction in the demand for the Treasury notes, including the 5-year T-Note, 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 5-year T-Note. The reverse happens when there is an economic recession.

Changes in interest rates: When the interest rates are declining, investors try to lock in their money at the existing rate, thereby creating additional demands for T-Notes. The additional demand pushes the T-Note 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: Fixed-income assets are less desirable when inflation is on the rise. This forces down the prices of Treasury notes. When inflation is declining, Treasury note prices tend to rise.

Political News/Events: When there is a major political event, which investors believe is bad for the economy, Treasury note prices go up, as investors move their funds to safe-haven assets 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. On the other hand, when political news or events are interpreted as being good to the economy, T-Note prices decline and yields go up, as investors look for securities with better returns. Mr. Trump’s election in November 2016 was a perfect example.

Conclusion

A 5-year T-Note futures contract is a debt security futures in which the underlying asset is a U.S. Treasury note with an original term to maturity of not more than five years and three months and a remaining term to maturity of not less than four years and two months as of the first day of the delivery month. The contract can be traded on the CME’s Globex electronic marketplace.

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

FAQ

Why trade 5-year T-Note futures?

Traders engage in the market for various reasons, including speculation on the short-term direction of the Fed’s interest rates. The market’s liquidity allows speculators to benefit from price fluctuations. Additionally, investors use it for hedging, portfolio diversification, and arbitrage trading opportunities.

How does the 5-year T-Note future trade?

The 5-year T-Note futures contract (ZF) trades on the Chicago Mercantile Exchange (CME) Group’s Globex electronic platform. Trading occurs Sunday to Friday from 5:00 p.m. to 4:00 p.m. Central Time (CT) the next day. Contracts represent one U.S. Treasury note with a face value at maturity of $100,000.

What factors affect 5-year T-Note futures?

Treasury yields and pricing are influenced by prevailing economic conditions, changes in interest rates, inflation levels, and political news/events. Economic booms or recessions, interest rate movements, inflation trends, and significant political events can impact T-Note prices and yields.