interest rates of US Treasury bonds are
a major factor in financial markets all
over the world these interest rates
influence the price of currencies
commodities stocks and of course other
bonds and fixed income investments one
way to speculate on potential changes in
interest rates is with US Treasury
futures these futures are a derivative
of Treasury bonds and one of the most
actively traded categories of futures in
this video you'll learn what Treasury
futures are the benefits and risks of
trading them and how futures might be
used in a portfolio u.s. treasury
futures are based on Treasury bonds
which come in all shapes and sizes with
varying coupon rates and maturities the
terms of a Treasury futures contract are
called contract specifications these
vary based on the type of Treasury
future you're trading but generally the
seller of the futures contract is
obligated to deliver a Treasury bond
with a specified maturity date to the
buyer at a certain time and for a
certain price although the US Treasury
offers bonds with a wide range of
maturities futures are not traded on
every US Treasury futures are only
available for 2 5 10 and 30 year
Treasuries the price of futures
contracts are constantly changing and
generally have an inverse relationship
to the yield of the underlying Treasury
bond in other words when the interest
rate of a certain Treasury bond goes up
the price of the corresponding Treasury
futures contract goes down institutional
investors such as banks insurance
companies pension funds finance
companies and mutual funds primarily use
Treasury futures to hedge large bond
portfolios against changes in interest
rates other traders may be attracted to
the size and liquidity in the Treasury
futures market and trade futures to
speculate on changes in interest rates
now that you understand what Treasury
futures are let's review some of the
potential benefits they're easy to
access electronically trade nearly 24
hours per day and are highly liquid
these attributes can help traders react
to changes in interest rates and manage
risk around the clock for example let's
suppose a central bank in Asia surprise
financial markets by raising interest
rates this news might send ripple
effects throughout interest rate markets
around the world if the news is negative
institutions and traders that don't
trade overnight but hold US Treasuries
could see the value of their positions
decreased
however because the futures market is
open merely 24 hours a day these
institutions and traders would be able
to use treasury futures to offset or
hedge their bond portfolio treasury
futures also provide a high degree of
leverage this allows investors to hedge
a large amount of US Treasuries with a
relatively low amount of capital now
let's talk about the risks because of
the leverage involved the value of a
Treasury futures contract can change
quickly over a very short amount of time
and significant losses can occur because
of this futures trading is not suitable
for all traders futures also trade on
margin in the futures market the general
term for margin is initial margin
requirement and refers to the minimum
amount of funds required to enter into a
futures contract the initial margin
requirement represents a fraction of the
total value of the contract often three
percent to 12 percent trading on margin
to be risky traders need to be sure they
understand the requirements further US
Treasury futures have unique quotation
practices delivery policies and
expiration cycles which takes additional
understanding as you've learned
speculating on interest rates has its
risks but it can be rewarding for
traders who understand futures and the
interest rate markets people use
Treasury futures in different ways
depending on their portfolios some
traders use Treasury futures to hedge a
portfolio of bonds or other fixed income
investments others use Treasury futures
as a way to help speculate on interest
rates
even if you don't plan on hedging or
speculating with bond futures you can
still follow and analyze the US Treasury
futures market when making investment
decisions changes in the price of
Treasury futures can help you stay
informed on interest rates which
influence all markets
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