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US Treasury Futures – A Derivative Of US Treasuries

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Introduction

 

 

US Treasury Futures are considered to be one of the most volatile and liquid future assets you can trade. A lot of day traders utilize these assets for relatively quick profits that have the potential to payout in a very substantial way – although it should be noted that day trading futures – or any asset for that matter – may not be suitable for your needs based on your comfort level in terms of risk tolerance and financial goals. In this lesson, we will be analyzing US Treasury Futures, the benefits and risks associated with trading this asset and how it could help you better understand the underlying fiscal and monetary policies of the US Government.

 

But before we begin, we would like you to read and agree to the Terms & Conditions of this post before you proceed any further.

Disclaimer: Invest In Wall Street is in no way financially or legally responsible for any investing decisions made by any of our readers and are, in turn, acting on their own free will. The information in this article is purely educational and should not be abused or misconstrued in any way, shape, or form.

US Treasury Futures Explained

 

 

The interest rates of US Treasury bonds are a major factor in financial markets all over the world. These
interest rates influence the price of currencies, commodities, stocks, and of course, other bonds and fixed income investments.

One way to speculate on potential changes in interest rates is with US Treasury Futures. These futures are a derivative of treasury bonds and are one of the most actively traded categories of futures.

US Treasury Futures, as you may have already guessed, are based on treasury bonds, which come in all shapes and sizes with varying coupon rates and maturities. Treasury bonds are actively traded and so there are many types of derivatives on these bonds, including options, futures, and swaps.

The terms of the treasury futures contract obligate the seller to sell a certain quantity of treasury bonds to a buyer at a certain time and for a certain price.

The price of future contracts are constantly changing and generally have an inverse relationship to the yield of the underlying treasury bond. In other words, when the interest rates of a certain treasury bond goes up, the price of the corresponding treasury futures contract goes down.

Although the US Treasury offers bonds with a wide range of maturities, futures are not traded on every US Treasury. Futures are only available for 2, 3, 5, 10 and 30 year treasuries. The most actively traded bond futures are the 10-year note and the 30 year bond.

Most trading in the treasury futures market is done by institutional investors.

Institutional investors such as banks, insurance companies pension funds, finance companies, and mutual funds, primarily use treasury futures to hedge large bond portfolios against changes in interest rates.

Other professional traders may be attracted to the size and liquidity in the treasury futures market and trade futures to speculate on changes in interest rates.

Institutions are attracted to bond futures because they are easy to access electronically, trade nearly 24 hours, and are highly liquid. These attributes can help institutions react to changes in interest rates and manage risk around the clock.

For example, lets suppose the central bank in Asia surprised financial markets by raising interest rates. This news might send ripple effects throughout interest rate markets around the world. US institutions that don’t trade overnight but have a large holding of US Treasuries could lose value if the news is negative.

 

 

However, because the futures market is openly yearly, 24 hours a day, these institutions would be able to sell treasury futures and either lock in a sale price or offset the loss of the bond portfolio with the gains from hedging.

Treasury futures also provide a high degree of leverage. This in turn, allows investors to hedge a large amount of US Treasuries with a relatively low amount of capital.

However, this high degree of leverage is also makes training treasury futures risky. Because of the leverage involved, the value of a treasury futures contract can change quickly over a very short period of time.

Additionally, changes in price can be caused by a wide variety of factors and unlike stocks or bonds, futures contracts trade on margin, which can be extremely complicated and risky. Furthermore, US Treasury futures have unique quotation practices, delivery policies, and expiration cycles.

Because of these risks, treasury futures may generally be suitable for sophisticated traders who understand how this complex market works.

Despite these risks, some individual investors use treasury futures as a way to help speculate on interest rates.

As you’ve learned, speculating on interest rates is risky, but it can be rewarding for investors who understand the complexities of futures and the interest rate markets.

Additionally, individual investors could use treasury futures to hedge a portfolio of bonds or other fixed income investments.

However, because of the leverage involved in treasury futures, this would only be appropriate for investors with a large fixed income portfolio. Even if you don’t plan on speculating or hedging with bond futures, you can still follow and analyze the US Treasury futures market when making investment decisions.

Changes in the price of treasury futures can help you stay informed on interest rates – which influences all markets.

 

Quick Recap

In Review…..

US Treasury Futures

  • One way to speculate on potential changes in interest rates is with US Treasury Futures. These futures are a derivative of treasury bonds and are one of the most actively traded categories of futures
  • US Treasury Futures, as you may have already guessed, are based on treasury bonds, which come in all shapes and sizes with varying coupon rates and maturities
  • The terms of the treasury futures contract obligate the seller to sell a certain quantity of treasury bonds to a buyer at a certain time and for a certain price
  • The price of future contracts are constantly changing and generally have an inverse relationship to the yield of the underlying treasury bond. In other words, when the interest rates of a certain treasury bond goes up, the price of the corresponding treasury futures contract goes down
  • Although the US Treasury offers bonds with a wide range of maturities, futures are not traded on every US Treasury. Futures are only available for 2, 3, 5, 10 and 30 year treasuries
  • Most trading in the treasury futures market is done by institutional investors. Institutional investors such as banks, insurance companies pension funds, finance companies, and mutual funds, primarily use treasury futures to hedge large bond portfolios against changes in interest rates
  • Other professional traders may be attracted to the size and liquidity in the treasury futures market and trade futures to speculate on changes in interest rates
  • Institutions are attracted to bond futures because they are easy to access electronically, trade nearly 24 hours, and are highly liquid. These attributes can help institutions react to changes in interest rates and manage risk around the clock
  • Treasury futures also provide a high degree of leverage. This in turn, allows investors to hedge a large amount of US Treasuries with a relatively low amount of capital
  • Additionally, changes in price can be caused by a wide variety of factors and unlike stocks or bonds, futures contracts trade on margin, which can be extremely complicated and risky. Furthermore, US Treasury futures have unique quotation practices, delivery policies, and expiration cycles
  • Despite these risks, some individual investors use treasury futures as a way to help speculate on interest rates
  • However, because of the leverage involved in treasury futures, this would only be appropriate for investors with a large fixed income portfolio. Even if you don’t plan on speculating or hedging with bond futures, you can still follow and analyze the US Treasury futures market when making investment decisions

 

 

 

And that US Treasury Futures in a nutshell. They are a type of derivative (futures) that tracks the performance of US Treasury bonds and can fluctuate due to a change in the interest rates.

These are considered to be a popular investment choice to trade since the market is practically open 24/7 and are known for being extremely liquid – this allows traders to catch and profit from volatile price action.

Due to the risks involved in trading this particular asset, it is recommended to leave the trading to the professionals such as institutional investors and professional day traders alike.

Although it may be considered to be a risky investment by some, US Treasury Futures allows investors to leverage the market during changes in interest rates and allows the investor to keep tabs on the economic policies of the US Department Of Treasury.

 

 

 

Congratulations, you have finally completed your Mutual Fund & ETF Investment training here at Invest In Wall Street. You are now qualified to make investment decisions regarding these asset classes – as you “learn as you earn” per se. It should be noted that no investment decision can ever guarantee or predict future success. It is up to you, the investor, to invest responsibly.

I hope you have enjoyed this post and found the information to be quite useful. If you have any questions or concerns, please feel free to leave them down in the comment thread below and make sure to like and share this post.

In the next module, we will be discussing another type of asset that most investors include in their portfolios:

Forex

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