Interest Rate Futures

Interest rate futures are among the highest-volume contracts traded globally. At the CME and CBOT, the most important U.S. interest rate futures include SOFR futures (which replaced Eurodollar futures as the benchmark for short-term interest rate expectations after LIBOR was phased out), 2-year and 10-year Treasury Note futures, 30-year Treasury Bond futures, and Federal Funds Rate futures.

Treasury futures are quoted as a price based on a par value of $100,000 (for 10-year and 30-year contracts). A 10-year note future quoted at 110-00 means $110,000 per contract. As interest rates rise, bond prices fall and Treasury futures prices decline; as rates fall, bond prices rise and futures prices increase. This inverse relationship is the foundation of duration-based hedging.

Bank and asset manager hedging applications dominate Treasury futures volume. A pension fund holding $500 million in long-duration bonds can sell Treasury futures to reduce its interest rate sensitivity during a period when rates are expected to rise, without disrupting the underlying portfolio. This is far more efficient than selling the bonds themselves, which would trigger transaction costs and potentially taxable events.

Federal Funds Rate futures are traded on the CBOT and are closely watched as a real-time market consensus on future Federal Reserve monetary policy decisions. Options traders, economists, and financial journalists all reference the implied Fed funds rate from futures prices when assessing the probability that the Fed will hike, cut, or hold rates at upcoming FOMC meetings.

SOFR (Secured Overnight Financing Rate) futures replaced Eurodollar futures as the primary short-term rate benchmark following LIBOR's discontinuation, tracking the overnight repo rate collateralized by U.S. Treasury securities. Understanding SOFR futures is now essential for any participant in U.S. short-term interest rate markets.