10-Year Long Gilt Dec '21 (GZ21)
|Contract||10-Year Long Gilt|
|Tick Size||0.01 points (GBP 10.00 per contract)|
|Contract Size||GBP 100,000 nominal value notional Gilt with 4% coupon|
|Months||Mar, Jun, Sep, Dec (H, M, U, Z)|
|Trading Hours||8:00a.m. points - 6:00p.m. GMT|
|Value of One Futures Unit||GBP 1,000|
|Value of One Options Unit||GBP 1,000|
|Last Trading Day||Two business days prior to the last business day in the delivery month|
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 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) traded mostly sideways during 2018, closing the year mildly higher by +1.86 points. The Eurex French 10-year OAT bond futures contract (Barchart.com symbol FN) also traded mostly sideways, closing the year down -4.38 points. The Eurex Italy Euro BTP 10-year bond futures contract (Barchart.com symbol II) fell sharply during spring 2018 but then stabilized and closed the year down -8.32 points.
European 10-year bond prices were generally stable in 2018 as the Eurozone economy showed tepid growth and as the European Central Bank (ECB) maintained its easy monetary policy. The Eurozone economy ended 2017 with a strong growth of +2.7% yr/yr in Q4-2017 and then remained relatively strong at +2.4% in Q1-2018 and +2.1% in Q2-2018, thus putting downward pressure on bond prices. However, the Eurozone economy then tailed off to +1.6% in Q3-2018 and +1.1% in Q4-2018 as the cumulative effects started stacking up from trade tensions and slower growth in China. In addition, German GDP growth turned negative in Q3-2018 and Italy's GDP growth was slightly negative in both Q3 and Q4.
Eurozone bond prices during 2018 saw support from weak inflation and a continued expansive monetary policy from the European Central Bank (ECB). The Eurozone core CPI remained weak in 2018 in the narrow range of 0.7%-1.2%, well below the ECB's target of just under 2%. The ECB kept its main refinancing rate at zero percent and its deposit rate at -0.40% during all of 2018. The ECB promised to keep its interest rates unchanged at least through summer 2019 and then in early 2019 extended that promise for unchanged rates until the end of 2019. The ECB's guidance for unchanged policy rates was a bullish factor for European bond prices.
The ECB reduced the size of its quantitative easing (QE) program during 2018 and ended its bond-buying program altogether in December 2018. Upon ending its QE program, the ECB promised to keep its balance sheet constant "for an extended period of time past the date when it starts raising the key ECB interest rates," which was supportive for European bond prices since it meant that the ECB would not be draining reserves from the banking system.
UK - The Liffe U.K. 10-year Gilt government bond futures contract (Barchart.com symbol G) fell to a 3-year low in early 2018 but then recovered and closed the year mildly higher by +2.08 points. Gilt prices were undercut in early 2018 as inflation remained high due to the plunge in sterling that followed the UK's vote in June 2016 to leave the EU (referred to as "Brexit"). The UK's CPI rose to a 6-year high of +3.1% y/y in November 2017 and remained high in early 2018, thus undercutting gilt prices and keeping pressure on the Bank of England (BOE) to raise interest rates. Indeed, the BOE in August 2018 did raise its base rate by +25 basis points to 0.75%, the highest level since 2009. However, the BOE was forced to back off its threats for another interest rate hike after the UK economy lost momentum later in 2018 and as Brexit negotiations became more troubled. UK GDP growth was relatively solid at +1.8% in 2016-17 but then tailed off to +1.4% in 2018. The BOE also backed off its threat for higher interest rates after UK inflation eased during 2018. The UK CPI eased to +2.1% by December 2018 and the core CPI eased to +1.9% y/y, thus roughly matching the BOE's inflation target. The UK interest rate outlook as of early 2019 depended mainly on whether the UK would be able to pull off a successful Brexit transition. The UK economy lost ground in late 2018 and early 2019 as some businesses gave up on a smooth Brexit transition and as business investment dropped.
Canada - The Montreal Exchange's Canadian 10-year government note futures contract (Barchart.com symbol CG) fell to a 4-year low in early 2018 but then recovered and closed the year mildly higher by +1.99 points. Canadian bond prices were undercut during 2018 by the Bank of Canada's (BOC) hawkish monetary policy. The BOC in 2018 raised its overnight lending rate three times by a total of 75 basis points to 1.75% by the end of 2018, bringing the overall rate hike since mid-2017 to a total of 1.25 percentage points. The BOC essentially followed the U.S. Federal Reserve in raising interest rates in an attempt to normalize monetary policy. The Canadian economy showed strong GDP growth of +3.0% in 2017 but then slid to +1.8% in 2018. Canadian GDP was particularly weak at +0.4% (quarter-on-quarter annualized) in Q4-2018 due to (1) trade tensions, (2) the slump in oil prices that hurt the Canadian oil industry, and (3) weaker global economic growth. The weaker Canadian economy in late 2018 allowed Canadian bond futures prices to rebound higher and close the year mildly higher.
Japan - The SGX Japan 10-year Japanese government bond (JGB) futures contract (Barchart.com symbol JX) traded sideways during most of 2018 but then rallied late in the year to post a new 2-year high and close the year mildly higher by +1.79 points. The Bank of Japan (BOJ) since September 2016 has pursued a yield-curve control policy where the central bank enforced a steeper yield curve with the 10-year JGB yield near zero, potentially allowing its 80-trillion-yen per year bond-purchase program to fluctuate in size to meet its yield target. The 10-year JGB yield has therefore been trading very close to the zero level. The BOJ on July 31, 2018 expanded the permissible range around the target to +/- 0.20% from 0.10%, potentially allowing the yield to trade as high as 0.20%. However, the BOJ also provided guidance that rates would remain very low for an "extended period," suggesting that the BOJ may not start raising rates until after the planned sales tax hike in Oct 2019 to 10% from 8% when the BOJ will see whether there will be a recession.
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