CME Says It May Introduce 20-Year Treasury Futures Contracts

(Bloomberg) -- CME Group Inc., the dominant provider of futures tied to U.S. Treasuries, took a step toward introducing contracts tied to the 20-year bonds that were brought back in 2020 by the federal government.

The Chicago-based exchange has designed three prototypes and will unveil them in a webinar on Oct. 19, according to a notice on its website announcing the event. Following that, CME will “determine the validity and design preferences of this potential new product.”

The U.S. resumed selling 20-year Treasuries in May 2020 after a more than three-decade hiatus. CME already lists futures on 2-, 3-, 5- and 10-year notes and three contracts that reference longer-maturity issues: Ultra 10-year, Bond and Ultra-Bond.

“The 20-year is likely here to stay, though sizes will probably be reduced over the coming quarters,” said Ralph Axel, an interest-rate strategist at Bank of America Corp. A futures contract referencing it “might help cash trading volumes and helps liquidity, and would certainly be interesting to basis traders.”

A 20-year contract might solve an issue CME has faced in the past with its futures for 10-year notes. Those contracts call for delivery of notes maturing in 6.5 to 10 years from the first day of the delivery month. Market yields determine which security in the basket is cheapest to deliver, and the futures contract tracks the price of that security.

For years, market yields have favored shorter-maturity issues in the cheapest-to-deliver calculation, and the 10-year contract has tracked a note maturing in around seven years. So in 2016, CME introduced the Ultra 10-year, whose basket consists of notes maturing in 9.5 to 10 years, overlapping with the regular 10-year contracts.

For the Bond contract, the deliverable basket is bonds maturing in 15 to 25 years, and so it includes the six 20-year bonds that have been issued since last May. But the cheapest-to-deliver bond is an old 30-year that matures in 2037.

When the Treasury Department beginning in 2017 was debating whether to introduce an ultra-long curve point -- a 50- or even 100-year bond -- to finance a widening budget deficit, a point in favor of going with 20-year issuance instead was that futures infrastructure already existed for hedging it. But because the contract tracks a shorter-maturity issue, its usefulness as a hedge for the 20-year is limited.

“You find that in these low-yield environments, the CTD is almost always the shortest maturity available in the basket,” said Praveen Korapaty, head of U.S. interest-rate strategy at Goldman Sachs Group Inc. “There’s no real futures contract that mimics the benchmark point.”

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