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How To Trade US Treasury Bonds and Notes Futures

When journalists refer to the national debt crisis, the large amount of money that the US owes to China, or to benchmark interest rates, they are inevitably citing US Treasury Bonds and Notes.

Due to the size, strength, and stability of the USA as a nation and economic force globally, US Treasury Bonds are, in essence, I.O.U.s from the Federal Government. US Treasury Bonds Rates have been the world’s benchmark for interest rates, borrowing, and all other debt securities and structures for over the last half century.

Why Trade US Treasury Bonds?

As such, US Treasury Bonds are considered the most liquid and stable debt in the world and are the primary debt security to satisfy pension funds, annuities, and other structures where principal preservation is one of the top priorities.

With trillions of US dollars’ worth of US Treasuries being held by a majority of banks, funds, and other financial institutions and structures, there is certainly nothing obscure about them.

Thus, the opportunities to trade them are much easier than, say, Rhodium futures. The global acknowledgement of US Treasury Bonds value makes them the backbone of a good many fixed income trading strategies.

Characteristics of US Treasury Bonds

The term, “T-Bond” usually refers to the 30 year maturity Long Bond, which is often used as an interest rate reference for long term fixed mortgages.

The shorter term 10 year Treasury Note is the main benchmark for medium term interest rates, and thus receives the majority of trading attention and focus on an intraday level.

For the individual investor seeking to create bond trading strategies, the greatest leverage factor will be afforded by utilizing US Treasury Futures and Options.

Daily US Treasury Bonds, 10-Year T-Notes (CBOT)

US Treasury Bonds Trading Hours

US Treasury Futures and Options trade on the Chicago Board of Trade (CBOT) electronically 23 hours a day, from 5pm – 4pm EST, with a weekday pre-open of 15 minutes and a Sunday pre-open of 45 minutes. Open outcry trading hours are from 7:20am – 2:00pm EST.

Factors In Choosing A Bond Trading Strategy

When formulating a bond trading strategy, the individual trader must take into account a number of factors that are constantly being updated in the news, and will have a profound effect on US Treasury Bond prices:

  • As the current administration has been enacting QE 1 and QE 2, the Fed has been printing money at unprecedented volumes. Since US Treasury Bonds values are tied to the US Dollar, oversupply of currency will inevitably devalue the money, thus reducing the value of the underlying bonds.
  • The current European Banking crisis and the bailout talks for PIIGS (Portugal, Italy, Ireland, Greece, Spain) have spooked investors away from the Euro, resulting in support for the US Dollar, but this is an artificial situation that will not continue in the long run.
  • Instability in Syria and nuclear threats from Iran, which effect oil prices, have also had a beneficial effect on US Treasury Bonds, which are seen as a “flight to safety” haven. Again, this is an artificial situation that can reverse itself very quickly.
  • As China owns such a large amount of US debt, the politics and financial health of China are being closely watched by many traders. The nuclear threat of North Korea, China’s own impending presidential change, and falling Chinese real estate prices can all result in Chinese dumping of US bonds on the market, which would depress prices.

Certainly those with high frequency trading strategies will want some kind of rapid news service access to keep track of these kinds of events, as intraday volatility will follow announcements on these and other topics. In those instances where a trader is bullish or bearish and is anticipating a strong move in one of those directions, a Butterfly spread may be a consideration.

This is where the trader is long a deep in the money and out of the money option and is short two at the money options. The cost of the long positions are offset by the two short positions, and the biggest risk is market stagnation.

US Treasury bonds offer immense liquidity and convenient market hours for the savvy trader, who follows world and domestic news events, and studies their effect on the markets.

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