Description

Interest rate futures contracts are widely traded throughout the world. The most popular futures contracts are generally 10-year government bonds and 3-month interest rate contracts. In Europe, futures on German interest rates are traded at the Eurex Exchange. Futures on UK interest rates are traded at the EuroNext-Liffe Exchange in London. Futures on Canadian interest rates are traded at the Montreal Exchange. Futures on Japanese interest rates are traded at the Singapore Exchange (SGX) and at the Tokyo Stock Exchange. A variety of other interest rate futures contracts are traded throughout the rest of the world (please see the front of this Yearbook for a complete list).

Euro-Zone - The Eurex German 10-year Euro Bund futures contract (Barchart.com symbol GG) fell slightly during 2021 and closed the year down -6.27 points. The Eurex French 10-year OAT bond futures contract (Barchart.com symbol FN) also fell slightly during 2021 and closed the year down -4.71 points. The Eurex Italy Euro BTP 10-year bond futures contract (Barchart.com symbol II) fell slightly during 2021 and closed the year down -5.00 points.

European 10-year bond prices posted their highs for 2021 in early January 2021 as the second wave of the pandemic undercut economic growth and prompted the ECB to pump trillions of euros into bond markets through its pandemic emergency purchase program (PEPP). Eurozone real GDP in 2020 fell sharply by -6.6% due to the pandemic shutdowns.

ECB policymakers in February became concerned about rising inflation and began talking about when to begin tapering its asset purchases. ECB Executive Board member Schnabel said in February that with a robust labor market and strong growth in prices, "we should start thinking about a gradual normalization of our policy." Eurozone bond prices tumbled to a 1-year low in May 2021 on rising inflation expectations after the 5-year forward inflation swap, used by the ECB to gauge expectations, jumped to 1.6%, a 2-year high.

European bond prices then staged a 2-month rally into early August 2021. The ECB, at its July policy meeting, said its PEPP asset purchases would continue through the end of March 2022 and changed its forward guidance in interest rates, saying that it will continue with ultra-loose monetary stimulus until it sees inflation reaching 2% "well ahead of the end of its projection horizon."

European government bond prices then trended lower into late October when they fell to 1-3/4 year lows. Rising price pressures prompted the ECB at its September policy meeting to "recalibrate" its bond-buying and reduce the pace of its PEPP monthly bond purchases to 60-70 billion euros a month from 80 billion euros a month. Bonds prices dropped to their lows for 2021 after the October ECB meeting when President Lagarde said, "the phase of higher inflation will last longer than expected."

European bond prices recovered into year-end as the emergence of the omicron Covid variant undercut economic growth in the Eurozone. At the December ECB meeting, President Lagarde said it "was very unlikely" the ECB would raise interest rates in 2022.

UK - The Liffe UK 10-year gilt government bond futures contract (Barchart.com symbol G) trended lower throughout 2021 and finished the year down -10.64 points (-7.9%). Gilts trended lower in 2021 on optimism that the rollout of the Covid vaccine would lead to economic recovery as the pandemic receded. In February, the Bank of England (BOE) talked about tapering its quantitative easing (QE) program, which sparked a slide in gilts. After falling to a 2-1/2 year low in May, gilt prices traded sideways to higher into August as the Covid delta variant kept pandemic restrictions in place that slowed the economic recovery. Gilt prices resumed their decline after the August BOE meeting when policymakers raised their inflation targets and said a "modest tightening over the forecast period was likely necessary." Gilt prices tumbled to a 3-year low in October as inflation pressures climbed. The UK CPI in December soared to a 30-year high of 5.4% yr/yr. The BOE, at its December policy meeting, raised its benchmark rate by 15 bp to 0.250% and projected UK inflation would peak around 6% in April 2022. Gilt prices recovered slightly into year-end 2021 as the emergence of the Covid omicron variant fueled concerns the economy would slow.

Canada - The Montreal Exchange's Canadian 10-year government note futures contract (Barchart.com symbol CG) retreated in 2021 and closed the year down -6.48 points. Canadian bond prices in early 2021 tumbled to a 2-year low in March as signs of strength in the Canadian economy bolstered expectations for the Bank of Canada (BOC) to tighten monetary policy. Canada's February GDP rose +0.5% m/m, the tenth straight monthly gain in GDP. Canadian bond prices rallied into Q3 and posted the high for 2021 in August as the Covid delta variant led to pandemic restrictions that slowed the economy as Canada's Q2 GDP unexpectedly contracted -by 1.1% (qtr/qtr annualized). Bond prices moved lower into year-end after the BOC took steps to return to a normal monetary policy. At its October policy meeting, the BOC announced that it would phase out its QE program and start raising interest rates as soon as April 2022.

Japan - The SGX Japan 10-year Japanese government bond (JGB) futures contract (Barchart.com symbol JX) traded sideways throughout 2021 and finished the year little changed. The Bank of Japan (BOJ) has pursued a yield-curve control (YCC) policy since September 2016. Under that YCC policy, the BOJ enforces a steeper yield curve with the 10-year JGB yield targeted near zero, allowing its 80-trillion-yen per year bond-purchase program to fluctuate in size to meet its yield target. Therefore, the 10-year JGB yield has been trading in a narrow range near zero, within the BOJ's target boundary of plus-or-minus 0.20%. The BOJ in March 2021 expanded that target boundary to 0.25% as JGB yields saw upward pressure from hopes for an end of the pandemic as vaccinations spread. The BOJ already had its policy rate at -0.10% when the pandemic struck, and the BOJ did not cut it further into negative territory since that could further damage the health of the nation's banks. In July, Japan's 10-year government bond prices rallied to a 1-1/2 year high after the new delta Covid variant forced the Japanese government to impose pandemic restrictions that curbed economic growth. However, a faster pace of vaccinations in Japan allowed the restrictions to be lifted, and the economy recovered. As a result, the Japanese economy posted its strongest pace of growth in 2021 in Q4 at 5.4% (q/q annualized). Also, Japanese consumer prices in December 2021 rose to a 2-1/2 year high of +0.8% yr/yr.

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