The Learn About Futures Insider For June 23, 2011: Treasury Notes

[Guest Katie Gray]

Treasury notes are debt obligations issued by the US Treasury. They are often viewed as a way to speculate in or hedge against future interest rate changes and are globally valued markets to use when trying to manage risk of the same.

2-year Treasury Notes

Contract Size: One U.S. Treasury note having a face value at maturity of $200,000.

Price Quote & Tick Size: Points ($2,000) and quarters of 1/32 of a point. For example, 109-16 represents 109 16/32, 109-162 represents 109 16.25/32, 109-165 represents 109 16.5/32, and 109-167 represents 109 16.75/32. Par is on the basis of 100 points. Minimum tick size is one-quarter of one thirty-second (1/32) of one point ($15.625, rounded up to the nearest cent per contract), including intermonth spreads.

Contract Months: March, June, September, December

Trading Specs: Trades open outcry and Globex (electronic) per the following schedule:

Electronic: SUN – FRI: 5:30 p.m. – 4:00 p.m. Central Time

Open Auction: MON – FRI: 7:20 a.m. – 2:00 p.m. Central Time

Daily Price Limit: None as of publishing date, but it is wise to consult the exchange.

Trading Symbols: TU, ZT

Past performance is not indicative of future results.

***chart courtesy of Gecko Software

5-year Treasury Notes

Contract Size: One U.S. Treasury note having a face value at maturity of $100,000.

Price Quote & Tick Size: Points ($1,000) and quarters of 1/32 of a point. For example, 119-16 represents 119 16/32, 119-162 represents 119 16.25/32, 119-165 represents 119 16.5/32, and 119-167 represents 119 16.75/32. Par is on the basis of 100 points. Minimum tick size is one-quarter of one thirty-second (1/32) of one point ($7.8125, rounded up to the nearest cent per contract), including intermonth spreads.

Contract Months: March, June, September, December

Trading Specs: Trades open outcry and Globex (electronic) per the following schedule:

Electronic: SUN – FRI: 5:30 p.m. – 4:00 p.m. Central Time

Open Auction: MON – FRI: 7:20 a.m. – 2:00 p.m. Central Time

Daily Price Limit: None as of publishing date, but it is wise to consult the exchange.

Trading Symbols: FV, ZF

Past performance is not indicative of future results.

***chart courtesy of Gecko Software

10-year Treasury Notes

Contract Size: One U.S. Treasury note having a face value at maturity of $100,000.

Price Quote & Tick Size: Points ($1,000) and halves of 1/32 of a point. For example, 126-16 represents 126 16/32 and 126-165 represents 126 16.5/32. Par is on the basis of 100 points.; minimum tick size is one-half of one thirty-second (1/32) of one point ($15.625, rounded up to the nearest cent per contract), except for intermonth spreads, where the minimum price fluctuation shall be one-quarter of one thirty-second of one point ($7.8125 per contract).

Contract Months: March, June, September, December

Trading Specs: Trades open outcry and Globex (electronic) per the following schedule:

Electronic: SUN – FRI: 5:30 p.m. – 4:00 p.m. Central Time

Open Auction: MON – FRI: 7:20 a.m. – 2:00 p.m. Central Time

Daily Price Limit: None as of publishing date, but it is wise to consult the exchange.

Trading Symbols: TY, ZN

Past performance is not indicative of future results.

***chart courtesy of Gecko Software

Treasury Note Facts

 

The United States Treasury has been responsible for federal finances for over two hundred years. The means through which it takes on debt are securities sold both domestically and to foreign investors. Treasury notes are issued in terms of 2, 3, 5, 7, and 10 years. Auctions for notes are held every month and a tentative schedule of upcoming auctions may be viewed online.

Chart data courtesy of treasury.gov

When discussing Treasury notes, the term “yield” comes into focus regularly. When the note is purchased at par, the yield is equal to the interest rate. Usually, if the price of the note goes down, the yield goes up while a higher price reduces yield.

Yield curves may also be important and are often cited in analysis of economic conditions. These are constructed from the yields for various maturities placed on a graph. A “normal” yield curve is one in which longer-term yields are higher than shorter-term. This is usually ascribed to the perception of higher risk or rising rates for longer term investments. An “inverted” yield curve has the opposite structure, with shorter-term yields higher than longer-term. This may often be associated with falling or anticipated fall in interest rates. Flat yield curves may also be present if a forecast of little difference exists between the yield rates for different maturities.

It is important to note that the futures contract delivery date is not associated with the maturity date of the Treasury note.

Key terms for this market include:

Coupon Rate – the stated interest rate for a bond or note when it is issued, so-called because some bonds had coupons on them to detach for interest payment redemption. A bond or note with an 8 percent coupon rate would have an 8 percent interest rate.

Yield Curve – the shape of the line on a graph plotting the interest rates of different maturity debts. There are three kinds of yield curves: normal, inverted, and flat.

Key Uses

 

Other than speculator participation within futures markets, Treasury note contracts may also be used for hedging a portfolio of non-US government securities or other interest rate risk. They are also used in trades intended to capitalize on changes in the yield curve.

Key Concerns

 

Interest rates or the forecasted changes in interest rates can have a profound effect on the futures price of Treasury notes. Daily Treasury yield curve rates are available on the US Treasury’s official website. Inflation or the possibility of inflation may also influence prices. The commonly watched factors which may affect trade include economic reports or events. This may include the following:

• Retail Sales

• Unemployment Claims

• Personal Income

• PPI

• CPI

• New Home Sales

• FOMC Meetings & Member commentaries

During the recent global recessionary period, there has been some discussion about China’s concerns over the safety of their assets in terms of their US holdings. These kinds of discussions may also impact futures prices.

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