Treasury Note Futures Research Articles

The Effects of Trader Type on Market Maker’s Effective Bid-Ask Spread

Using intraday trading data on U.S. Treasury note futures, we analyze the effects of trader type on market maker’s effective bid-ask spread. We find that market makers tend to experience losses when price uncertainty increases in the market, even though market maker’s effective BASs are positive on average. When the overall trading volume increases, the effects of economies of scale and competition between market makers and exchange member institutions cause market makers to narrow the effective bid-ask spread. However, when off-exchange traders increase their trading volume, market makers respond by lowering their buy prices and increasing sell prices, thereby widening the effective bid-ask spread. The results reveal that market makers protect themselves against risk when trading with off-exchange traders.

The effect of treasury auctions on 10‐year Treasury note futures

AbstractUsing 15‐min intervals over the period 2000–2017, it is shown that auctions of US Treasury securities have an economic and statistically significant impact on the 10‐year Treasury note futures market. Prices move higher, volatility increases and there is an upturn in trading volume in the interval immediately following an auction. Higher bid‐to‐cover ratios, and bid‐to‐cover ratios that exceed the average, lead to positive returns and lower return volatility. This is consistent with bid‐to‐cover ratios serving as a proxy of demand for the auctioned securities. Primary dealers, who purchase the largest proportion of each issue, have the greatest influence on the market response. This is particularly evident when auction demand increases while they have a short futures position. Together, the results are consistent with traders (particularly primary dealers) buying back short futures hedges immediately following the auction, and suggests that futures are used to hedge at least some inventory risk.

The Effect of Treasury Auctions on 10-Year Treasury Note Futures

Using 15-minute intervals over the period 2000 - 2017, we show that auctions of U.S. Treasury securities have an economic and statistically significant impact on the 10-year Treasury note futures market. Prices move higher, volatility increases, and there is an upturn in trading volume in the interval immediately following an auction. We find that higher bid-to-cover ratios, and bid-to-cover ratios that exceed the average, lead to positive returns and lower return volatility. This is consistent with bid-to-cover ratios serving as a proxy of demand for the auctioned securities. Primary dealers, who purchase the largest proportion of each issue, have the greatest influence on the market response. This is particularly evident when auction demand increases while they have a short futures position. Together, our results are consistent with traders (particularly primary dealers) buying back short futures hedges immediately following the auction, and suggests that futures are used to hedge at least some inventory risk.

The Low-Volatility Anomaly, Interest Rates, and the Canary in a Coal Mine

Capital markets are interconnected. The low-volatility anomaly in equity markets can be partly attributed to changes in interest rates in fixed-income markets. The authors extend this contemporaneous relationship to serial relationships across time. They show that returns from the low-volatility anomaly in U.S. stocks have information about future changes in U.S. Treasury yields. Specifically, when low-volatility stocks outperform high-volatility stocks, Treasury yields tend to decline subsequently. This relationship does not seem to exist in the opposite direction. Trading strategies in U.S. Treasury note futures based on forecasting models using this relationship would have been profitable. Even though the common perception is that the bond market is more prescient than the equity market in terms of anticipating market movements and economic shocks, the authors show that in this instance, equity investors move ahead of bond investors and they are the canaries in the coal mine. <b>TOPICS:</b>Security analysis and valuation, analysis of individual factors/risk premia, fixed income and structured finance

A state‐price volatility index for the U.S. government bond market

AbstractUsing the Arrow–Debreu state‐contingent pricing methodology, this paper derives a U.S. government bond market volatility index (GBVX). I show that GBVX is an unbiased predictor for the next 30 day realised volatility of the Treasury note futures return. GBVX also subsumes the information of GARCH, EWMA and historical volatility measures. Furthermore, GBVX serves as an effective predictor for the future realised volatilities of a wide class of fixed income portfolios. The results suggest GBVX as a powerful instrument for volatility forecasting in the fixed income markets.

Understanding the impact of monetary policy announcements: The importance of language and surprises

Abstract Monetary policy announcements have a significant impact on financial market liquidity. This study provides a novel perspective on the factors driving this relationship in the market for 10-year Treasury note futures: Target rate surprises and the complexity of the monetary policy statement language are important determinants. Differences of opinion resulting from interpretation of complex language appear to result in more trading volume despite relatively low levels of liquidity (a negative liquidity-volume relationship), while large target rate surprises reduce trading activity (a positive liquidity-volume relationship). The dynamic changes over time, as unconventional polices are adopted by monetary authorities and, high frequency traders become more pervasive. Central bankers may aid market liquidity by minimizing surprises, and issuing statements that are easier to understand (with shorter sentences and more familiar words).

From pit to electronic trading: Impact on price volatility of U.S. Treasury futures

This paper investigates the dynamics of price volatility and trading volume of 10-year U.S. Treasury note futures within the context of transition from pit to electronic trading. The analysis is conducted over four discernible phases of futures trading evolution: the pit-only phase, the leap to electronic trading, and the electronic trading dominant phase, which is divided further into two periods, the before and after the financial crisis of 2007/2009. Generalized autoregressive conditional heteroskedasticity with in-mean conditional variance and generalized error distribution parameterization (GARCH-M-GED) tests are conducted to examine the conditional volatility of total returns index as a function of trading volume. The empirical results show a consistently negative relationship between the trading volume and price volatility for all four analyzed phases. They also show decreasing leptokurtosis (except for the direct effects of the recent crisis), continuously high persistency in volatility, as well as a weakening impact of unexpected ARCH-type shocks during the most recent analyzed period. Overall, the shift to electronic trading entails a substantial increase in trading volume, but not in price volatility of Treasury futures.

An analysis of the failed municipal bond and note futures contracts

AbstractThis study analyzes the failure of the municipal bond and municipal note futures contracts. The municipal bond contract is shown to have been the most effective hedge in the municipal market over its tenure. Changes in volume in the municipal bond contract were closely related to changes in the volume in the U.S. Treasury bond futures contract, the spot–municipal‐over‐bonds (MOB) ratio, and visible supply. The failure of the municipal bond contract is mainly attributed to a decrease in trading volume in the U.S. Treasury futures market. This was impacted by the onset of electronic trading, which the municipal futures market was reluctant to embrace. The municipal note contract was a less effective hedge than U.S. Treasury note futures and ten‐year London Interbank Offered Rate swaps. The failure of the municipal note futures contract is attributed to the existence of well‐established alternative hedges, and segmentation in the municipal market. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:656–679, 2008

Are Multiple Hedging Instruments Better than One?

The authors examine the effectiveness of the ten–year, the five–year, and the two–year treasury note futures contracts in hedging the price risk of fixed–rate mortgage–backed securities. The ten–year treasury note futures contract offers superior hedging opportunities across all six coupon MBS examined. Using multiple instruments simultaneously results in minor improvements with–in sample. In out of–sample experiments, however, the use of a single instrument provides better hedging performance than the use of multiple instruments.