The US Department of the Treasury will issue much more debt than the market had expected following the Covid-19 crisis, including some $ 54 billion over the next three months in the form of 20-year bonds, according to an official announcement May 6.
The Treasury estimates that there will be strong investor demand for 20-year bonds, which will allow it to finance its longer-term bonds at today’s very low interest rates.
20 year bond, we were waiting for you
Beyond the next three months, if the 20-year bond is an integral part of the regular Treasury issuance cycle, it should become the seventh tenor of the United States Treasury, actively negotiated, meeting the maturities of two, three, five, seven. , 10 and 30 years old. bonds, all traded on the BrokerTec platform of the CME group.
As with all new financial instruments, liquidity is expected to develop gradually in bond trading at 20 years, although market participants expect secondary trading to take off relatively quickly in the strong interest of asset managers and other longer-term investors.
The new bonds should increase the liquidity of the CME group Futures contract on treasury bills. The new issue will fall squarely in the middle of the criteria for delivering bonds with maturities between 15 and 25 years.
Already the second largest basket available after the Classic 10 years, bonds could see a significant increase under even conservative estimates. And given government spending on the Covid-19 stimulus, this growth could be even greater.
The new 20-year bond should find a ready audience, both with investors and traders for whom it will provide an important additional trading point on an interest rate curve that has already seen an increase in the volumes of derivatives these last years. The curve has sharply widened in recent weeks in parallel with the anticipation of an increase in coupon issues.
Much of the growth in activity levels has been driven by asset managers, such as pension funds, which are the main end users of interest rate products. Asset managers have been drawn to the off-balance sheet effectiveness of many bond and bond futures in this part of the curve, as they seek to manage the risks associated with their long-term commitments.
Longer for longer
The new 20-year bond issue corresponds to the general trend in the interest rate market towards longer-term exposures. It also offers new spread trading opportunities for hedge funds and other proprietary traders. They will be able to express their views on the relative value of the 20-year bond compared to other related instruments, including treasury bill futures, which generally track the value of the The cheapest obligation to deliver around 15 years.
There is already significant market activity beyond the duration of the proposed bond of 20 years. The Treasury continues to issue large 30-year bonds and CMEs Futures contracts on US Treasury bonds are based on a deliverable basket of Treasury bonds with at least 25 years to run.
The growing interest in risk management for longer-term exposures is reflected in the performance of Ultra 10 futures, which has become the fastest-growing interest rate product launch in history . Ultra 10 had more than a million interest lots opened in early May 2020.
The proposed 20-year bond would add another issue point to the cash bond curve between existing 10-year Treasury bonds and 30-year bonds, replicating a term structure that has proven effective on the side futures for some time. In doing so, the launch is likely to improve the liquidity of related products on both the cash and futures side, creating new trading and risk management opportunities for market participants.
(This article is sponsored and produced by the CME Group, which is solely responsible for its content.)
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