To many traders, a 30-year Treasury bond is a 30-year Treasury bond, but the intricacies within the contract specs coupled with the Treasury Department’s decision to stop issuing new 30-year debt in 2001, had left many traders, particularly duration managers, wanting.
Robin Ross, managing director of interest rate products for CME Group, says for years, “People asked, ‘when are you going to have a real 30-year bond?’”
Now that the Treasury has reissued the long bond, and plenty of them, CME Group is launching the “ultra bond,” a 30-year bond contract where the deliverable securities will be comprised of cash bonds with 25 or more years to maturity. The original 30-year — or “classic bond” as CME Group’s marketing team is calling it — calls for deliverable securities of 15 or more years to maturity.
Richard Regan, managing partner at Pro Trading Course, says that there was an issue with delivering long-term bonds, especially those with 15 or 16 years left to maturity. “People were having trouble finding bonds to deliver,” he says.
Ross points out that in a low interest rate environment like the one we have been in the cheapest to deliver bonds are the ones with the fewest years left to maturity. If the interest rate environment changes, which it eventually will, the cheapest to deliver would be on the long end.
There were no new 30-year bonds being auctioned for five years, and for several years prior to that, the number of long bonds being auctioned were fewer and fewer as the deficit was being reduced. What you ended up with was a product that was not truly a long bond, or one certainly not acting like a
30-year instrument.
Ross says they knew something was amiss when the 30-year swap spread became inverted. “You wouldn’t expect that to be negative,” she says, adding that it reflected the need for people to have something to hedge that was closer to 30 years to maturity. She says the response to this from duration managers has been encouraging and verified the need for the new contract.
But CME Group needed the Treasury to reissue the long bond, which they did, and for supplies to build up before moving forward. “That created the necessary supply to enable us to offer [the ultra]. For physical delivered contracts, you need enough supply to issue the 30-year,” Ross says.
Ross would not offer any predictions of success or volume benchmarks, but she did say that in all the years she has been in the industry — 30 years coincidently — she has never seen such interest in a new contract.