Treasury bond futures are contracts that allow investors to acquire the right to buy or sell a bond on a specified future date for a predetermined price. The contracts' underlying assets are government obligations issued by the U.S. Treasury. Futures contracts trade on exchanges and play a key role in market economies by facilitating hedging and speculation. (Editor: see References 3 and 4)
Select the dollar amount of the futures contract. The first step in making a futures investment is to determine the amount of underlying bonds you wish to control. Futures contracts carry standardized terms, including the contract size. For example, 30-year U.S. Treasury Bond futures have a contract size of $100,000. Thus, in order to achieve $500,000 of exposure you would have to purchase five futures contracts. (Editor: see Reference 1 + Reference 3)
Calculate the initial and maintenance margin requirements. To purchase a Treasury bond futures contract, you do not need to purchase the entire amount of the underlying instrument. Instead, contracts are purchased against the payment of a marginal amount. For example, 30-year U.S. Treasury Bond futures require $2,700 of initial margin per $100,000 of notional bonds. The maintenance requirement is $2,000 per $100,000 of notional bonds. If your margin account falls below this amount you will be required to replenish it.
Monitor price movements. Treasury bond futures are priced on a "tick" system. Each tick represents 1/32nd of a point. For a $100,000 30-year U.S. Treasury contract, each tick is equal to $31.25 of notional value. There are 100 points in a 30-year U.S. Treasury contract value of $100,000.
Calculate profits, losses and returns. Your investment performance is determined when you decide to close your contract or allow it to expire. If, for example, you purchased one 30-year U.S. Treasury contract, your cost would be equal to the initial margin requirement of $2,700. If the contract increased in value by one point, you would have made a gain of $1,000, or a 37 percent return on your investment.
Before investing in a futures contract, understand its risks. Futures contracts employ leverage that amplifies gains and losses.
- CME Group: U.S. Treasury Bond Futures
- CME Group: Performance Bonds | Margins Requirements for CME Group Products
- Economy Watch: Bond Futures
- Commodity Futures Trading Commission. "Basics of Futures Trading." Accessed June 25, 2020.
- FINRA. "Security Futures—Know Your Risks, or Risk Your Future." Accessed June 25, 2020.
- CME Group. "E-mini S&P 500 Futures Quotes." Accessed June 25, 2020.
- CME Group. "Understanding Futures Expiration & Contract Roll." Accessed June 25, 2020.
- CME Group. "Tick Movements: Understanding How They Work." Accessed June 25, 2020.
- CME Group. "The Benefits of Day Trading Futures." Accessed June 25, 2020.
- Before investing in a futures contract, understand its risks. Futures contracts employ leverage that amplifies gains and losses.
Giulio Rocca's background is in investment banking and management consulting, including advising Fortune 500 companies on mergers and acquisitions and corporate strategy. He also founded GradSchoolHeaven.com, an online resource for graduate school applicants. He holds a Bachelor of Science in economics from the University of Pennsylvania, a Master of Arts in English from the University of Hawaii at Manoa, and a Master of Business Administration from Harvard University.