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The Learn About Futures Insider: 30-Year Treasury Bond

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This market is based on the longest maturity bond issued by the US Treasury. It is often viewed as a way to speculate in or hedge against future interest rate changes and is valued globally as a market to use when trying to manage risk of the same. From their debut in the 1970s on the CBOT, Treasury bond futures have become a popular and liquid market.

 

Contract Size: One U.S. Treasury bond having a face value at maturity of $100,000.

 

Price Quote & Tick Size: Points ($1,000) and 1/32 of a point. For example, 134-16 represents 134 16/32. Par is on the basis of 100 points. Minimum tick size is One thirty-second (1/32) of one point ($31.25), except for intermonth spreads, where the minimum price fluctuation shall be one-quarter of one thirty-second of one point ($7.8125 per contract).

 

Contract Months: March, June, September, December

 

Trading Specs: Trades open outcry and Globex (electronic) per the following schedule:

Electronic: SUN - FRI: 5:30 p.m. - 4:00 p.m. Central Time

Open Auction: MON - FRI: 7:20 a.m. - 2:00 p.m. Central Time

 

Daily Price Limit: None as of publishing date, but it is wise to consult exchange.

 

Trading Symbols: US, ZB

 

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Past performance is not indicative of future results.

***chart courtesy of Gecko Software

 

 

30 Year T-Bond Facts

 

The United States Treasury has been responsible for federal finances for over two hundred years. The means through which it takes on debt are securities sold both domestically and to foreign investors. The 30 year Treasury bond is the longest maturity of these investment options. When they mature, the Treasury can either pay the cash owed plus interest or issue new securities.

 

Major foreign holders of US treasuries are detailed in the following graph:

 

LAF_4-7-11.jpg

 

The key characteristics of a bond from either a government or corporation are:

 

* The face value

* The coupon rate

* Maturity

* The issuer

 

In the case of T-Bonds, the face value is $100,000, the maturity is 30 years, and the issuer is the US Treasury. The coupon rate is the fixed interest rate for the payments which will be paid to the buyer of the bond and is set when issued.

 

The price of the bond is not necessarily the same as the face value. Usually, the price may vary throughout the life of the bond. When the price is higher than face value, the bond is selling at a premium and when it is lower, it is termed as selling at a discount.

Normally, bond price is inversely related to interest rates. If interest rates go up, the price of bonds normally falls and vice versa. This notion is due to the relationship of the bond's interest rate as compared to the prevailing interest rates.

 

When discussing T-Bonds, the term "yield" comes into focus regularly. When the bond is purchased at par, the yield is equal to the interest rate. Usually, if the price of the bond goes down, the yield goes up while a higher price reduces yield.

 

Yield curves may also be important to note and are often cited in analysis of economic conditions. These are constructed from the yields for various maturities placed on a graph. A "normal" yield curve is one in which longer-term yields are higher than shorter-term. This is usually ascribed to the perception of higher risk or rising rates for longer term investments. An "inverted" yield curve has the opposite structure, with shorter-term yields higher than longer-term. This may often be associated with falling or anticipated fall in interest rates. Flat yield curves may also be present if a forecast of little difference exists between the yield rates for different maturities.

 

It is important to note that the futures contract delivery date is not associated with the maturity date of the bond and normally the deliverable bonds will have at least 15 years before maturity.

 

Key terms for bonds include:

 

Coupon Rate - the stated interest rate for a bond when it is issued, so-called because some bonds had coupons on them to detach for interest payment redemption. A bond with an 8 percent coupon rate would have an 8 percent interest rate.

 

Yield Curve - the shape of the line on a graph plotting the interest rates of different maturity debts. There are three kinds of yield curves: normal, inverted, and flat.

 

Key Uses

 

Other than speculator participation within this futures market, the 30 year Treasury bond contract may also be used for hedging a portfolio of non-US government securities or other interest rate risk.

Key Concerns

 

Interest rates or the forecasted changes in interest rates can have a profound effect on the futures price of Treasury bonds. Inflation or the possibility of inflation may also influence prices. The commonly watched factors which may affect trade include economic reports or events. This may include the following:

 

* Retail Sales

* Unemployment Claims

* Personal Income

* PPI

* CPI

* New Home Sales

* FOMC Meetings & Member commentaries

 

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Disclaimer: There is a substantial risk of loss in futures trading and it is not suitable for all investors. Losses can exceed your account size and/or margin requirements. Commodities trading can be extremely risky and is not for everyone. Some trading strategies have unlimited risk. Educate yourself on the risks and rewards of such investing prior to trading. Futures Press Inc., the publisher, and/or its affiliates, staff or anyone associated with Futures Press, Inc. or http://www.learnaboutfutures.com, do not guarantee profits or pre-determined loss points, and are not held monetarily responsible for the trading losses of others (subscribers or otherwise). Past results are by no means indicative of potential future returns. Fundamental factors, seasonal and weather trends, and current events may have already been factored into the markets. Options DO NOT necessarily move lock step with the underlying futures contract. Information provided is compiled by sources believed to be reliable. Futures Press, Inc., and/or its principals, assume no responsibility for any errors or omissions as the information may not be complete or events may have been cancelled or rescheduled. Any copy, reprint, broadcast or distribution of this report of any kind is prohibited without the expressed written consent of Futures Press, Inc.

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