10-Year Treasury Bond Futures Trading Strategy – Backtest and Practical Example

The US government bond market provides the most liquidity, security (in terms of creditworthiness), and diversity in the bond market. The 10-year T-Note futures is not just one of the ways to invest in the Treasury debt market but also the favorite medium-term debt instrument. It offers the opportunity to hedge risk or speculate on the direction of interest rates. Do you have a 10-year T-Note futures strategy?

The 10-Year T-Note futures strategy is the methodology or technique you can use to profitably trade the 10-Year T-Note futures contract — a financial derivative product that represents a contract to exchange a specified amount of a qualifying 10-Year T-Note on a future date, at a pre-agreed price.

A good 10-Year T-Note futures strategy would involve technical and fundamental analyses of the market. Trading on the CME Globex platform and deliverable, you can trade the T-Note futures contract to hedge your exposure in the Treasury market or speculate on the direction of the U.S. government’s interest rates.

This post answers some questions about the 10-Year Treasury Bond futures strategy. To show you how can develop a trading strategy, we provide you an example with a backtest.

What are 10-Year Treasury Bond futures?

The 10-Year T-Note futures are futures contracts whose underlying asset is the 10-Year Treasury note. It is a financial derivative product that represents a contract to exchange a specified amount of a qualifying 10-Year T-Note on a future date at a pre-agreed price.

As with T-Bonds, T-Note contracts are standardized, and trading is overseen by a regulatory agency that ensures a level of equality and consistency. A coupon payment is made every month to the t-note holder until the maturity year is reached. The 10-year T-Note contract trades on the CME Globex platform, and at the contract expiry, the seller of the bond futures contract delivers a Treasury bond that satisfies the terms contract in areas of maturity range and interest rate.

You can use the T-Note futures strategy to speculate on the direction of the U.S. government’s medium-term interest rate changes or hedge risk at the short end of a yield curve.

What is a 10-Year Treasury Bond futures strategy?

The 10-Year T-Note futures strategy refers to the trading approach to trade the T-Note futures market profitably. This often includes technical and fundamental analyses for market timing and position sizing and risk management techniques.

To trade futures successfully, you must have a solid trading strategy. Your 10-year T-Note futures strategy must include precise entry and exit signals and risk management techniques. Your strategy may also include different trading approaches, such as spread trading against different Treasury futures.

10-Year Treasury Bond futures strategy backtest

To show you an example of a Treasury bond strategy, we show you one backtested strategy we have employed on the longer duration bonds (20 years – TLT). However, both 10 and 20 years durations are considered long, and the results do not deviate that much, except that the volatility tends to be higher the longer the duration is.

Instead of backtesting the futures contract, we use the ETF with the ticker code IEF, which tracks Treasury bonds with a 7-10 year duration.

We use the same trading rules as we did in our article called TLT Seasonal Trading Strategy:

• On the last sixth trading day of the month, go long at the close.
• Sell at the close of the last trading day of the month.
• Sell short at the close of the last trading day of the month.
• On the seventh trading day of the new month, cover at the close.

This strong seasonality has existed for about 30 years in the bond market. We are not going to try to explain why, but we will go right at the equity curve of the strategy:

The equity curve shows a robust strategy with excellent performance and only modest drawdowns over the 20 years.

The trading statistics and metrics read like this:

Most of the gains have come from the long side, but the short side has also contributed.

Despite being invested only 57% of the time, the strategy has beaten buy and hold (4.08% vs. 3.76%). The time spent in the market is indicated in the row called “exposure”.

We end the backtest by showing the equity curve of the long trades:

The code for the strategy is included in our product called Code And Logic For All Free Strategies.

What is the seasonality of 10-Year Treasury Bond futures?

In the Treasury debt markets, seasonality refers to the tendency of a bond’s price to move in a fairly predictable way during certain periods of the year. The periods may refer to the months or seasons (winter, spring, summer, and fall) of the year.

The 10-Year T-Note futures have been noted to perform better during the last seven months of the year (except October) than during the first five months. See the chart below:

What moves the 10-Year Treasury Bond market— What affects the 10-Year Treasury Bond market the most?

Some of the variables influencing the 10-year T-Note futures include these:

• The state of the economy: When the economy is performing well, there is less demand for Treasury debt securities, which lowers the price of 10-year T-note futures while raising the yield. On the other hand, when the economy is struggling, demand for Treasury securities rises as investors seek to bury their cash in safe-haven assets.
• Inflation: Decreasing inflation has the opposite impact of rising inflation in terms of dragging down prices. This is due to the impact of inflation on interest rate decisions.
• Interest rates: A higher interest rate translates into a greater return and a cheaper bond price. On the other hand, T-Note prices increase and yields decrease when interest rates are decreasing.
• Natural catastrophes and sociopolitical events: The resulting uncertainty can cause investors to flood the bond market, driving up bond prices.

How are 10-Year Treasury Bond futures traded?

The 10-Year T-Note futures contracts are traded on the CME Group’s Globex platform from Sundays to Fridays from 6:00 p.m. to 5:00 p.m. ET the next day, with a one-hour break at the end of each day (Monday to Thursday). The face value of the 10-Year T-Note contract at maturity is $100,000, and the price quotation is in points and fractions of points with par on the basis of 100 points.

The contracts come in quarterly cycles of March, June, September, and December, with contracts listed for 3 consecutive quarters. Settlement is by delivery method, and trading terminates at 12:01 p.m. CT, 7 business days prior to the last business day of the contract month.

How do you start trading 10-Year Treasury Bond futures?

To trade futures, there is a need for a futures broker that would grant you access to the CME Group’s exchange where 10-year T-Note futures contracts are traded and help clear your trades. So, register with a futures broker and fund your account. Since futures contracts are leveraged instruments, you need not have the full dollar worth of the contract before you can trade it — you deposit the initial margin or a little more than that.

If you just want to speculate with the instrument without the hurdles of trading futures, you may trade the T-Note CFDs that track 10-year T-Note futures. With a CFD contract, you are in an agreement with the CFD broker to exchange the price difference between the opening and closing of a trade. CFD brokers, like IG, may offer 10-year T-Note futures CFD.

What is the 10-Year Treasury Bond trading at?

The 10-Year Treasury Note futures were trading at $114’20’0 as of December 19, 2022. See the chart here on the CME platform chart. The chart was retrieved from TradingView.

As the price changes from time to time, what is quoted here may not be the price it would be trading when you are reading this post. To get the real-time price on the CME platform or directly from TradingView, click either of those links.

What’s the 10-Year Treasury Bond futures hour?

The 10-Year T-Note futures trade on the CME Globex electronic platform from Sundays to Fridays, from 5:00 p.m. to 4:00 p.m. CT the next day. There is a one-hour break before the start of the next trading day (4:00 p.m. – 5:00 p.m. CT) from Monday to Thursday for maintenance.

For CME ClearPort, the schedule is Sunday – Friday, 5:00 pm – 4:15 pm CT. There is a 45–minute break each day beginning at 4:15 pm.

For Trading at Settlement (TAS), the schedule is Sunday 5:00 p.m. – Friday 2:00 p.m., with a break from 2:00 p.m. – 6:00 p.m. CT on Monday – Thursday.

Where can I find trading charts?

Charts can be found on any trading platform that offers chart services. If your platform does offer charts, you can subscribe to trading charts via a third-party platform, such as MultiCharts. You can also use TradingView, which offers free access to charts of different instruments.

However, to connect to your broker, you have to subscribe to the Pro services. You can also access the TradingView chart via the CME platform.

What are the trading symbols for 10-Year Treasury Bond futures?

The trading symbol for the 10-year T-Note contract is ZN. The product codes for the different services are as follows:

• CME Globex: ZN
• CME ClearPort: 21
• Clearing: 21
• TAS: ZNS

What is the specification for the 10-Year Treasury Bond futures contract?

A contract of the 10-year T-Note futures has a face value at maturity of $100,000. The price quotation is in points and fractions of points with par on the basis of 100 points.

The contracts come in quarterly cycles of March, June, September, and December, with contracts listed for 3 consecutive quarters. TAS becomes available for a new contract month on the 15th day, 3 months prior to the first day of the contract month. However, two TAS months (and corresponding calendar spread) are supported for the two weeks prior to the nearer month’s termination.

Settlement is by physical delivery of the asset, and on the Globex platform, trading terminates at 12:01 p.m. CT, 7 business days prior to the last business day of the contract month. But TAS trading terminates at 2:00 p.m. CT on the last business day of the month prior to the contract month.

The asset must have the right quality in terms of maturity and interest rate. It must be a U.S. Treasury note with a remaining term to maturity of at least six and a half years, but not more than 10 years, from the first day of the delivery month. The invoice price equals the futures settlement price times a conversion factor, plus accrued interest. The conversion factor is the price of the delivered note ($1 par value) to yield 6 percent.

Why should you start trading 10-Year Treasury Bond futures?

You can trade the 10-year T-Note futures to speculate on the direction of interest rates or hedge risk at the short end of a yield curve. Trading the contract also offers the opportunity to use a different trading strategy, such as spread trading against different Treasury futures or arbitrage trading between two different exchanges or platforms. It also offers a way to diversify your investment portfolio into safe-haven debt instruments.

What is the contract size?

A full contract of the 10-year T-Note futures has a face value at maturity of $100,000.

What is the tick size?

The tick size for outright trading on the Globex platform is $15.625, while that of the calendar spread is $7.8125. For TAS, it is zero or +/- 4 ticks in the minimum tick increment of the outright.

What is the minimum price fluctuation for 10-Year Treasury Bond futures?

The minimum fluctuation for outright is 1/2 of 1/32 of one point or 0.015625 points; for the calendar spread, it is 0.0078125 points.

Are there any ETFs?

Yes, there are a few: the Vanguard Intermediate-Term Treasury ETF (VGIT), which offers exposure to intermediate-term government bonds that mature in three to ten years, and the iShares 7-10 Year Treasury Bond ETF (IEF), which tracks the investment results of an index composed of U.S. Treasury bonds with remaining maturities between seven and ten years.

These ETFs may only provide relatively little interest rates, but they can be cost-efficient for fine-tuning fixed-income exposure.

What factors affect 10-Year Treasury Bond prices?

The common factors that move the 10-year T-bond market include the state of the economy, inflation, and interest rate changes. Other factors are natural disasters and sociopolitical events.

What is the all-time high for 10-Year Treasury Bond futures?

Based on the TradingView chart for the 10-year T-Note futures (ZN), the all-time high for the 10-year T-Note futures is $140’24’0, which it achieved in March 2020, but that may not tell the true story, as the chart started on from May 2000.

What are the biggest risks in trading 10-Year Treasury Bond futures?

The biggest risk comes from adverse price movement since futures are leveraged instruments. Leverage can magnify losses. For example, if you trade with a 20x leverage, a 5% negative movement can wipe out your account.

What is the settlement method?

Delivery

What is the settlement procedure?

On contract expiry, the seller would deliver a qualifying (in terms of maturity and interest) 10-year T-Note. The delivery procedure is via the Federal Reserve book-entry wire-transfer system.

What is the block minimum for 10-Year Treasury Bond futures?

For TAS on Long-Term U.S. Treasury Note Futures (6½ to 10-Year), the block minimum is as follows:

• RTH – 5,000
• ETH – 2,500
• ATH – 1,250

What is the difference between 10-Year Treasury Bond futures and the CFD for 10-Year Treasury Bond?

CFD trading differs from futures in that futures contracts have fixed expiration dates, while CFDs can be traded indefinitely.

Which forex pair is the same as 10-Year Treasury Bond futures

10-Year Treasury Bond CFD

What are some important dates for this market?

Some of the important dates in the Treasury market are as follows:

• The 1800s: T-Notes were issued to fund wars
• 1917: The first Treasury bond was issued to fight WW1
• May 3, 1982: 10-Year T-Note futures were launched on CBOT
• May 1, 1985: Options on the futures contracts were launched

What is the highest 10-Year Treasury Bond has ever been — its all-time high?

Based on the TradingView chart for the 10-year T-Note futures (ZN), the highest level the 10-year T-Note futures have ever traded was $140’24’0 in March 2020.

What is the lowest 10-Year Treasury Bond has ever been — its all-time low?

Based on the TradingView chart for the 10-year T-Note futures (ZN), the lowest level the 10-year T-Note futures have ever traded was $95’03’0 in May 2000.

Conclusion

You can use the 10-Year Treasury Bond futures strategy to hedge your exposure in the bond market, diversify your portfolio into the treasury market, or simply speculate on price fluctuations.

FAQ:

How do I start trading 10-Year T-Note futures?

To trade futures, you need a futures broker. Register with a broker, fund your account, and deposit the initial margin. If you prefer not to trade futures directly, you can trade T-Note CFDs that track 10-Year T-Note futures.

What is the seasonality of 10-Year T-Note futures?

Seasonality in the Treasury debt market refers to the predictable movement of bond prices during specific periods. The 10-Year T-Note futures tend to perform better during the last seven months of the year (except October).

What factors influence the 10-Year Treasury Bond market the most?

Variables such as the state of the economy, inflation, interest rates, and natural catastrophes or sociopolitical events can significantly impact the 10-Year T-Note futures market.