Bond is a form of debt that governments or companies issue to investors for a fixed period of time, in exchange for regular interest payouts.
Trading bond (or treasury) futures is extremely popular among traders as the bond market is one of the largest and most liquid market in the world.
In this post, let's do a deep dive into the bond market and learn how can a trader trades the bond futures!
Treasury Bill/Note/Bond - What's the difference?
When a trader first learns about bond futures, he/she will come across bond (or 'treasury') futures worded in 'bill', 'note', or 'bond'.
The difference, essentially, is the maturity period of these instruments:
Super short-term bonds (<1 year) = Treasury Bills
Mid-term bonds (2 – 10 years) = Treasury Notes
Long-term bonds (>10 years) = Treasury Bonds
The longer the maturity period of the bond, the more sensitive it is to fluctuation in interest rate, which also leads to more volatility.
Commonly Traded Bond Futures:
ZT (2-year treasury note)
ZF (5-year treasury note)
ZN (10-year treasury note)
TN (Ultra 10-year treasury note)
ZB (30-year US treasury bond futures)
UB (Ultra US Treasury Bond futures)
3 Advantages of trading bond futures:
(A) High Per-Tick Value
Bonds have a relatively higher per-tick value compared to equities.
As an example:
Ultrabond’s (UB) per tick value is $31.25,
30-year Treasury Bond (ZB) is $31.25,
10-Year Treasury Note (ZN) is $15.63.
In other words, bond traders do not need a large run of ticks to be making money in bond futures. Instead, traders can trade bond futures at a large size and look for small tick profits.
eg. 2 ticks profit trading 10 lots of UB is a $625 winner.
That said, remember that goes both ways. This is why you have plan your exit strategy carefully.
(B) Low Volatility + High Liquidity
Generally, compared to popular futures products like equity futures (eg. S&P500 (ES), Nasdaq (NQ), Dow Jones (YM)), bonds tend to have lower volatility.
For instance, a 100-tick move at the open for bond futures is extremely rare, while it is very common among equities.
In addition, bond futures tend to be more liquid compared to other products.
Equity futures like ES, NQ, or YM may have less than 10 contracts sitting in the bid or ask side at any given point, hence it doesn’t take a big market order to come in and wipe them out.
In comparison, it is common to see 1000+ contracts in the bid or ask side for the 10-Year treasury note (ZN). As such, it is harder for a sudden market order to move the market.
The less erratic nature of bond futures makes it easy for traders to read the order flow and respond accordingly.
(C) Correlation
In general, bond futures products tend to correlate very well.
This produces trade opportunity when, say, the Ultrabond is lagging momentarily behind the 10-year and 30-year bond as there is a strong chance it will catch up to the rest of the products.
Which bond futures should you trade?
While choosing which bond futures trade, you can base your selection on the liquidity of the product.
Generally, the longer the maturity of the bond product, the more sensitive it is to the interest rate swings, which results in a more volatile movement.
Essentially, for bigger moves, the Ultrabond (UB) is a good choice while the 10-year treasury note (ZN) would be a good choice for slower, yet calmer moves.
That said, since bond futures correlate well together, you can also use bond futures together for trade opportunities.
How to trade the treasury bond
Below, I list down a non-exhaustive list of how a trader can trade the bond futures market - though note that this should not be taken as buy/sell recommendation:
(i) Breakout
Taken when price breaks out of prior support/resistance.
(ii) Trend following
Taken when trend indicators like a Moving Average crossover cross and form a confirmation to a direction.
(iii) Mean reversion
Taken with the idea that price will move back to the average (ie. mean) as it is overextended to the up or downside.
A Bollinger-band indicator or a VWAP band indicator can be helpful in this kind of trading strategy.
(iv) Correlation
Traded alongside other bond futures, correlation trade finds short-term discrepancy in price movement of a bond futures (eg. UB) relative to other bond products (ZB, ZN), and takes advantage of it reverting back to its normal correlation.
Verdict: Bond futures opens up a world of opportunities for traders!
The bond market is a great market to trade for beginner and seasoned traders alike.
Due to its liquid and stable nature, it is a great choice for traders looking for a calm or less erratic market to trade.
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Disclaimers
Any of the information above is produced with my own best effort and research.
This post is produced purely for sharing purposes and should not be taken as a buy/sell recommendation. Past return is not indicative of future performance. Please seek advice from a licensed financial planner before making any financial decisions.
Leverage is a financial tool that comes with its advantages and risks. Please learn and understand both the upsides and downsides of leverage before using it for trading.
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