10-Year T-Note Mar '19 (ZNH19)
|Tick Size||One half of 1/32 of a point ($15.625 per contract) rounded up to the nearest cent per contract; par is on the basis of 100 points|
|Trading Months||Mar, Jun, Sep, Dec (H, M, U, Z)|
|Trading Hours||5:00p.m. - 4:00p.m. (Sun-Fri) (Settles 2:00p.m.) CST|
|Value of One Futures Unit||$1,000|
|Value of One Options Unit||$1,000|
|Last Trading Day||Seventh business day preceding the last business day of the delivery month|
U.S. interest rates can be characterized in two main ways, by credit quality and by maturity. Credit quality refers to the level of risk associated with a particular borrower. U.S. Treasury securities, for example, carry the lowest risk. Maturity refers to the time at which the security matures and must be repaid. Treasury securities carry a full spectrum of maturities, from short-term cash management bills, to T-bills (4-weeks, 3-months, 6-months), T-notes (2-year, 3-year, 5-year, 7-year, and 10-year), and 30-year T-bonds. The most active futures markets are the 10-year T-note futures, 30-year T-bond futures, and Eurodollar futures, all of which are traded at the CME Group.
Prices - CME 10-year T-note futures prices (Barchart.com electronic symbol ZN) were generally weak during 2018, closing the year down 2-3/64 points. The 10-year T-note yield in 2018 closed the year mildly higher by +28 basis points at 2.68%. 10-year T-note futures prices during 2018 extended the sharp sell-off that began in 2016, posting an 8-1/2 year nearest-futures low in late 2018. T-note prices were undercut in 2018 by the strong U.S. economy and the Fed's hawkish monetary policy. However, T-note prices were able to rebound higher in late 2018 due to (1) the sharp sell-off in the global stock markets in Q4-2018, (2) slower global economic growth, and (3) anticipation of the Fed's switch in early 2019 to a more dovish monetary policy.
The U.S. economy in 2018 was strong with GDP growth of +2.9% due to the big personal and corporate tax cuts that took effect on January 1, 2018. The strength of the economy boosted inflation and forced the Federal Reserve to maintain a hawkish monetary policy. On a quarterly basis, U.S. GDP growth in Q2-2018 reached its peak of a 4-year high of +4.2% (quarter-on-quarter annualized), before easing to +3.4% in Q3 and +2.6% in Q4. U.S. GDP eased later in 2018 due to trade tensions, slower growth in China and the Eurozone, and the fading stimulus from the January 1 tax cuts.
Inflation expectations remained generally strong in 2018 and undercut T-note prices. The 10-year breakeven inflation expectations rate, which measures the difference between nominal and inflation-adjusted TIPS T-notes, rose to a 4-year high of 2.21% in May 2018 and then moved sideways through the summer. T-note expectations were boosted during the first three quarters of 2018 by the strong U.S. economy and by the sharp recovery rally in crude oil prices. Crude oil futures prices rallied to a 4-year high of $76.90 in early October 2018 due to the success of the OPEC+ production cut agreement in reducing global oil inventories. However, inflation expectations then fell sharply in late 2018 due to the slowing global economy and the plunge in oil prices seen during Q4-2018.
The Federal Reserve's hawkish policy during 2018 was a bearish factor for T-note prices. The Fed continued its string of interest rate hikes that began in 2015 with four more rate hikes in 2018 totaling one percentage point. By the end of 2018, the Fed had pushed its federal funds rate target range up to an 11-year high of 2.25%/2.50%. The Fed during 2018 also conducted a hawkish monetary policy by allowing its balance sheet to decline by a total of $370 billion (-8%) down to $4.1 trillion, thus draining excess liquidity from the banking system. However, the Fed at its January 2019 FOMC meeting surprised the markets by dropping its guidance for higher interest rates and switching to a neutral policy where the next policy move could either be a rate hike or a rate cut. Anticipation of that more dovish Fed policy allowed T-note prices to rebound higher in late 2018 and early 2019.
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