The Chicago Board of Trade offers futures contracts on 30-year T-bonds, 10-year T-notes and 5-year T-notes. Each contract represents $100,000 worth of...
The Chicago Board of Trade offers futures contracts on 30-year T-bonds,
10-year T-notes and 5-year T-notes. Each contract represents $100,000 worth of underlying securities.
However, remember that such bonds are worth more or less depending upon their maturity dates. (Bonds that will expire in one year are worth less than those with twenty years remaining to collect coupon payments.)
Therefore, these futures contract are more like a representative index of that type of Treasury security, a range of deliverable securities, based on exchange guidelines.
The CBOT has developed conversion factors to enable their futures contracts to fairly represent the underlying securities. The conversion factor represents the security's price in terms of what its price would be if its par value had a coupon rate of 6% yield to maturity.
Therefore, those government bonds with an interest rate of less than 6% have a conversion factor under 1. Those with a rate of over 6% have a conversion factor over 1.
Therefore, this can get very complicated, and there's no need to know all the conversion factors. All you need to know is that there is a system in place to make sure that the value of the bonds within each $100,000 contract is equivalent in vale to every other $100,000 bond contract.
All these contracts expire on a quarterly basis: March, June, September and December.
The most liquid months are the forward months, or the closest expiration month. If it's now July, trade the September contract. You'll find the December contract market too thin.
The T-Bond contracts of $100,000 are quoted in fractions of the par value (or face value). One tick is $31.25 for 1/32 of a point.
They are quoted looking something like this: 115-26. That is 115,000 and 26/32. Since each 1/32 is $31.25, that's 26 X 31.25 = $812.50, for a total of 115,812.50 contract value. Each round $1000 is known as a handle, so going from 115 to 116 is moving a full handle.
Years ago, this long bond was the only market for serious futures traders. However, its popularity went down when the United States Treasury Department stopped issuing new bonds on a regular basis.
Because "the bond" has the long maturity, it carries the most interest rate risk, and therefore must pay the highest rate of interest. It's at the top of what's called the yield curve.
It's a good idea if you're contemplating trading interest rate futures to understand the economics that drive these markets. If you can predict what the Federal Reserve will do following their meetings, you can get rich.
