Interest Rate Trading With T Bill Futures

Many futures and options traders bypass the interest rate markets in search of something sexier like the S&P 500 index or oil futures. This appears primarily, due to a lack of easily understood educational materials on these markets and a general feeling in the trading community that interest rates are difficult to understand, thus boring.

This article will try to change these generally held perceptions by providing a simple overview of how to trade the 13-week(3-month) Treasury Bill Futures and some thoughts on the anticipated direction of the contracts.

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Let’s start out with the most basic definitions for those of you who are totally new to this market. The money market is part of the debt market. It is made from very short term, highly marketable debt securities. Out of these securities, US Treasury Bills or T Bills are the most marketable and liquid. Most debt instruments are out of reach of many individual investors as they sell in minimum denominations of $100,000.00. T-bills sell in minimum denominations of $1000.00.

T-bills were created by the US Government as a way to raise money by selling them to the public. Investors purchase T-bills at a discount from the face maturity value and at the maturity date receives the face value. Think about the US Savings Bonds you may have received as a child, same concept. T-bills are short term with initial maturities, of 28, 91, and 182 days, issued weekly. T-bills can be purchased directly from the US Treasury or on the secondary market from a government security dealer. T-bills are considered to be risk-free debt instruments and represent pure interest rate movements.

The Chicago Mercantile Exchange CME created the 13-week(3-month) T-bill futures in 1976 to follow the cash T-Bill market and settle to the weekly auction rate. The contracts are very liquid, have tight bid/ask spreads and are easily accessible to traders via a variety of brokers. GLOBEX and pit futures trade on a side by side basis in this market.

The contract’s underlying instrument is the 3-week (13-month) T-bill with a face value at maturity of $1,000,000.00. The minimum price move or tick is 1/2 point which is equal to .005 or $12.50/contract. It is listed in the months March, June, September, December and has the ticker symbol GTB on GLOBEX. The exchange imposed price limits are 2 index points above or below the Reference RTH price. The exchange requires very low margins or performance bonds posted to trade GTB of $405.00 making this product very appealing to traders.

13 week Tbill

Let’s take a look at the technical picture of the 3-month T bill in an attempt to gain an understanding of the potential future direction. As you can see from the chart, price recently broke below the lower Bollinger Band, and has bounced back into the space between the 20 period Simple Moving Average and the lower Bollinger Band.

Technically, it looks like price will continue this upward trajectory to the 20 period SMA at a minimum. The current turmoil in the credit markets, the Fed perhaps being forced to raise rate due to inflation concerns and the general current market instability, makes the T-bill futures an enticing product for traders to take a very close look at right now.

Best Wishes!!

David Goodboy is Vice President of Marketing for a New York City based multi-strategy fund.