5-Year T-Note Futures Trading Strategy (Backtest, Example, and Insights)

5-Year T-Note futures strategy is the methodology or technique you can use to profitably trade the T-Note futures market, and this often includes technical and fundamental analyses. 5-Year T-Note futures are financial derivative products that represent a contract to exchange a specified amount of a qualifying 5-Year T-Note on a future date, at a pre-agreed price. The contract trades on the CME Globex platform. You can use the T-Note futures strategy to speculate or hedge the direction of the U.S. government’s interest rates.

U.S. Treasury notes, or T-Notes, is a type of debt instrument issued by the U.S. government with a maturity period of between 1-10 years, and the 5-year T-Note futures is one way to participate in the Treasury market, which offers you the opportunity to hedge risk or speculate on the direction of interest rates. What is a 5-year T-Note futures strategy?

In this post, we answer some questions about the 5-Year T-Note futures strategy. At the end of the article, we show you an example of a strategy and how to backtest it.

What are 5-Year T-Note futures?

U.S. T-Notes represent a loan to the U.S. government, and the government agrees to repay the principal at maturity, plus coupon interest. By buying a T-Note, you are a creditor rather than a shareholder. One popular way to buy U.S. T-Note is through futures.

The 5-Year T-Note futures are financial derivative products that represent a contract to exchange a specified amount of a qualifying 5-Year T-Note on a future date, at a pre-agreed price. As with T-Bonds, T-Note contracts are standardized and are 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. 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.

The 5-year T-Note contract trades on the CME Globex platform. 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 5-Year T-Note futures strategy?

The 5-Year T-Note futures strategy is the methodology or technique you can use to profitably trade the T-Note futures market. This often includes technical and fundamental analyses for market timing, as well as position sizing and risk management techniques.

If you want to trade futures successfully, you must have a solid trading strategy. Your 5-year T-Note futures strategy must include precise entry and exit signals, as well as risk management techniques. Your strategy may also include different trading approaches, such as spread trading against different Treasury futures.

5-Year T-Note futures strategy backtest

A backtest with strict trading rules, settings, statistics, and historical performance is coming soon.

What is the seasonality of 5-Year T-Note futures?

Seasonality, in financial trading, is a concept that explains the tendency of an asset’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 5-Year T-Note futures have been noted to perform better during the last seven months of the year (apart from October) than during the first five months. See the chart below:

What moves the 5-Year T-Note — What affects the 5-Year T-Note the most?

These are some of the factors that move the 5-year T-Note futures:

• How well the economy is doing: When the economy is in great shape, the demand for Treasury debt instruments reduces, dragging down the price of the 5-year T-note futures while increasing the yield. Conversely, when the economy is doing badly, the demand for Treasury instruments increases, as people look to hide their money in safe-haven assets.
• Inflation: Rising inflation drags the price down, whereas declining inflation has the opposite effect. This is because inflation affects interest rate decisions.
• Interest rates: The higher the interest rate, the more the yield and the lower the price. On the other hand, when interest rates are falling, T-Note prices rise, and yields decline.
• Natural disasters and Sociopolitical events: The uncertainty that follows some political and social events can make investors flock into the bond market, pushing prices up.

How are 5-Year T-Note futures traded?

The 5-Year T-Note futures contracts are traded on the CME Group’s futures exchange. The contract can be traded on the Globex platform from anywhere around the world 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.

The contracts come in quarterly cycles of Mar, Jun, Sep, and Dec, with contracts listed for 3 consecutive quarters. The face value of the 30-Year T-Bond 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. Settlement is by delivery method, and trading terminates at 12:01 p.m. CT, on the last business day of the contract month.

How do you start trading 5-Year T-Note futures?

You need a futures broker that would grant you access to the CME Group’s exchange where 5-year T-Note futures contracts are traded and help clear your trades. So, the first thing to start trading this contract is to 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.

You may also want to trade the T-Note CFDs that track 5-year T-Note futures if you just want to speculate without going through the challenges of trading 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 5-year T-Note futures CFD.

What is the 5-Year T-Note trading at?

The 5-year T-Note futures were trading at $107’23’0 per pound as of November 29, 2022. See the chart here on the CME platform chart. The chart (TT) was captured from TradingView.

Note that the price changes from time to time, so the price quoted here may not be the price it’s trading when you are reading this post. Click on either of those links to get the real-time price on the CME platform or directly from TradingView.

What’s the 5-Year T-Note futures trading hours?

The 5-year T-Note futures trade on the CME Globex electronic platform from Sundays to Fridays, from 6:00 p.m. to 5:00 p.m. ET the next day. There is a one-hour maintenance period before the start of the next trading day (5:00 p.m. – 6:00 p.m. ET) from Monday to Thursday. For Trading at Settlement (TAS), the schedule is Sunday – Friday 6:00 p.m. – 3:00 p.m. ET (5:00 p.m. – 2:00 p.m. CT).

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 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?

You can find the trading chart on any trading platform you are using to trade. If your platform does provide trading charts, you can get charts from a third-party platform, such as MultiCharts. A more common option is TradingView, which offers free access to charts of different instruments once you register. However, you have to subscribe to the Pro services if you want to connect it to your broker, assuming it is one of the brokers supported by the platform. You can also access the TradingView chart for the 5-year T-Note futures via the CME platform.

What are the trading symbols for 5-Year T-Note futures?

The trading symbol for the 5-year T-Note contract is ZF. The product codes for the different services are as follows:

• CME Globex: ZF
• CME ClearPort: 25
• Clearing: 25
• TAS: ZFT

What is the specification for the 5-Year T-Note futures contract?

A contract of the 5-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 Mar, Jun, Sep, and Dec, with contracts listed for 3 consecutive quarters. Settlement is by physical delivery of the asset, and on the Globex platform, trading terminates at 12:01 p.m. CT on 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 an original term to maturity of not more than five years and three months and a remaining term to maturity of not less than four years and two months as of the first day of the delivery month. The delivery invoice amount equals the futures settlement price times a conversion factor, plus accrued interest, and the conversion factor is the price of the delivered bond ($1 par value) to yield 6 percent.

Why should you start trading 5-Year T-Note futures?

Trading the 5-year T-Note futures allows you to speculate on the direction of interest rates as well as offers you the ability to hedge risk at the short end of a yield curve. It 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. You can also use the T-Note futures to diversify your investment portfolio into safe-haven debt instruments.

What is the contract size?

A full contract of the 5-year T-Note futures has a face value at maturity of $100,000.

What is the tick size?

One tick of the 5-year T-note futures is ¼ of 1/32nd of a point rounded up to the nearest cent per contract. Since one point value is $1,000, the tick size is ($1,000/32) x 1/4 = $7.8125. the tick size is $7.8125 per contract.

What is the minimum price fluctuation for 5-Year T-Note futures?

The minimum fluctuation (one tick) is 1/4 of 1/32 of one point or 0.0078125 points.

Are there any ETFs?

Yes, there are a few. There is the Vanguard Intermediate-Term Treasury ETF (VGIT), which offers exposure to intermediate-term government bonds that mature in three to ten years. Another option is the iShares 3-7 Year Treasury Bond ETF (IEI), which offers exposure to Treasurys with three to seven years to maturity. While these provide relatively little interest rates, they can be a cost-efficient tool for fine-tuning fixed-income exposure.

What factors affect 5-Year T-Note prices?

Some of the factors that move the 5-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 5-Year T-Note futures?

Based on TradingView’s chart for the 5-year T-Note futures, the all-time high for the 5-year T-Note futures is $127’07’7, which it achieved in August 2020, but that may not tell the true story, as the chart started on from May 2000.

What are the biggest risks in trading 5-Year T-Note futures?

The biggest risk is from adverse price movement. Since futures are leveraged instruments, the losses are calculated using the actual value of the contract size traded, not the margin deposited. So, 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?

The seller would deliver a qualifying 5-year T-note in terms of maturity and interest. The delivery procedure is via the Federal Reserve book-entry wire-transfer system.

What is the block minimum for 5-Year T-Note futures?

RTH – 5,000

ETH – 2,500

ATH – 1,250

What is the difference between 5-Year T-Note futures and the Forex instrument for 5-Year T-Note?

Some forex and CFD brokers offer T-Note futures CFDs. CFD trading differs from futures in that futures contracts have fixed expiration dates, while CFDs can be traded indefinitely.

Which forex instrument is the same as 5-Year T-Note futures

5-Year T-Note 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
• December 10, 1929: The US Treasury shifted from the fixed-price subscription system to a system of auctioning and issued its first auction

What is the highest 5-Year T-Note has ever been — its all-time high?

Based on TradingView’s chart for the 5-year T-Note futures, the highest the contract has ever reached was $127’07’7, which it achieved in August 2020.

What is the lowest 5-Year T-Note has ever been — its all-time low?

Based on TradingView’s chart for the 5-year T-Note futures, the lowest the contract has ever traded was $96’28’5, which happened in May 2020.

Conclusion

Trading Treasury futures is a good way to diversify your trading portfolio from equities, but you must know what you are doing. It is important to use a 5-Year T-Note futures strategy that has been proven to make money.

FAQ:

How do you start trading 5-Year T-Note futures?

To start trading 5-Year T-Note futures, you need a futures broker providing access to the CME Group’s exchange. Register with a broker, fund your account, and deposit the initial margin. Trading occurs on the CME Globex platform during specific hours.

What factors affect 5-Year T-Note prices?

Factors influencing 5-Year T-Note prices include the state of the economy, inflation, interest rate changes, natural disasters, and sociopolitical events. Economic strength, inflation levels, and interest rate movements play significant roles in price dynamics.

What is the seasonality of 5-Year T-Note futures?

The seasonality of 5-Year T-Note futures indicates a tendency to perform better during the last seven months of the year (excluding October) compared to the first five months. Seasonal patterns can influence trading strategies.