10-Year T-Note Dec '18 (ZNZ18)
|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) remained generally weak in early 2017 following the sharp sell-off seen in late 2016 when Republicans swept both the White House and Congress in the November 2016 elections, sparking expectations for tax cuts and an infrastructure program that would boost the economy and increase inflation. T-note prices were able to modestly recover during mid-year as the Republicans dropped the infrastructure idea and put aside a tax cut, spending the first half of the year trying unsuccessfully to repeal Obamacare.
However, T-note prices then fell sharply late in the year when Republicans in December 2017 were finally able to pass a massive tax cut bill. The fiscal stimulus from the tax cuts was expected to boost the U.S. economy and put upward pressure on inflation, thus forcing the Fed to steadily raise interest rates. The tax cut bill also boosted the size of the federal budget deficit, causing the Treasury in early 2018 to boost the size of its Treasury auctions. T-note prices closed 2017 virtually unchanged on the year. The U.S. 10-year T-note yield fell to the low of the year in September 2017 at 2.01% but then rebounded sharply higher to close the year at 2.41%, down -3 basis points from the 2016 close of 2.44%.
T-note prices during 2017 found safe-haven demand from (1) Washington political uncertainty as a special counsel was named to investigate possible collusion in the 2016 presidential election, (2) geopolitical concerns from North Korea's nuclear program and ballistic missile tests, and (3) European political uncertainty on concerns that populists could gain power in several key European national elections during the year.
Inflation expectations remained generally strong in 2017, thus undercutting T-note prices. The 10-year breakeven inflation expectations rate, which measures the difference between nominal and inflation-adjusted TIPS T-notes, posted a 3-year high of 2.09% in January 2017 as expectations for a massive Republican tax cut sparked concern about a stronger economy. In addition, crude oil prices rallied to a 1-1/2 year high in January 2017 on the OPEC/non-OPEC production cut agreement, which boosted inflation expectations. Inflation expectations then eased through mid-2017 due to a downside correction in crude oil prices and a delay in Republican consideration of tax cuts. However, the 10-year breakeven rate then moved higher in the second half of 2017 as oil prices rallied again and as Republicans approved a massive tax cut in December 2017.
Fed policy was negative for T-notes during 2017 as the FOMC raised its federal funds rate target range by a total of +75 basis points (bp) to 1.25%/1.50%. The FOMC also projected three more +25 bp rate hikes for 2018. In addition, the Fed in October 2017 began a balance draw-down program to progressively reduce the size of its balance sheet, which was bloated by the post-crisis quantitative easing programs. Also, there were concerns that Jerome Powell, who took over as the new Fed Chair in February 2018, might follow a more hawkish policy than that of outgoing Fed Chair Janet Yellen.
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