30 Years of the Two-Year Note

At a Glance

  • 2-year note futures averaged a record 725,000 contracts per day in 2019, while also setting numerous open interest records.
  • It took two listings and several years for the 2-year to find its place as a key part of the listed Treasury suite

June marks the 30th anniversary of one of CME Group’s most important interest rate futures products – 2-Year Treasury Note Futures.

The 2-Year has proved to be a tremendous success, posting strong growth in recent years.  4.6 billion lots have transacted since the contract was launched in June 1990.

The 2-Year contract was no runaway success, though. It took two listings and several years for it to find its place as a key part of the listed Treasury suite.

Early Doubts

The Chicago Board of Trade (CBOT) first launched U.S. Treasury Bond futures in 1977, before adding the highly successful 10-Year Note contract in 1982. CBOT added 5-Year and 2-Year futures shortly after, but these failed on first listing and were quickly delisted.

The view at the time was that the exchange had not provided sufficient education to market participants about the potential utility of contracts with a shorter duration than the established 10-Year Note.

On the basis that the fault lay with marketing rather than with the contracts themselves, CBOT successfully relaunched 5-Year Treasury Note futures in 1988 and then the 2-Year in mid-1990.

Even then the contracts were slow burners. The 2-Year was thinly traded until around 2004.

The 2-Year filled a need for interest rate futures traders. Prior to its arrival, investors and traders looked to the 5-year note as the earliest maturity instrument to hedge interest rate risk. The nearer part of the yield curve was inaccessible for futures traders who needed to manage risk in shorter term maturities.


Margin Gains

To the surprise of some observers that had written it off, the 2-Year contract began to see a surge in volumes in 2004.  This was driven by the CBOT’s decision in 2003 to move its clearing business to what is now CME Clearing.  This move opened up a new world of margin efficiencies to short-term interest rate traders, and the 2-Year benefited in particular from sharing a clearing house with CME’s Eurodollar futures.

After the contract was cleared by CME Clearing, and particularly once it was made available for trading on CME’s Globex trading system, 2-Year Note futures have never looked back.

A further boost to the contract came from the CME’s decision to reduce the minimum price increment for 2-Year Note futures by half (to 1/8 of 1/32nd) in January 2019.

The change enabled finer price discovery and improved cost-to-trade by up to 32%, attracting more end-user participation and ensuring that 2-Year Note futures averaged a record 725,000 contracts per day in 2019, while also setting numerous open interest records.

30 Years Young

The long journey to success of the 2-Year contrasts with the experience of a much more recent CME interest rate futures launch – the 1-month and 3-month futures based on the Secured Overnight Financing Rate (SOFR).

SOFR futures were launched just two years ago. But they have already seen the kind of growth that took the 2-Year contract almost two decades to achieve.

Like the 2-Year after its transition from CBOT, the new SOFR products have benefited enormously from sharing a platform with CME Group’s other Short-Term Interest Rates products, including Eurodollar and Fed Funds futures. The ease of spreading across interest rate products has also contributed significantly to the development of SOFR liquidity.

The delayed success story of the 2-Year Note Futures and the rapid uptake of SOFR futures provide powerful confirmation of the benefits of a supportive ecosystem.  Margin efficiencies and shared market technology transformed the fortunes of the 2-Year and continue to support the development of SOFR futures.

is Global Head of Research at CME Group. He is based in London.

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