 Hello, and a very good evening to everybody. I'm Eric Norland from the CME Group, where I work as a senior economist covering all of the different markets. And we're going to begin in just a few minutes here. I'm just going to maybe give a tiny bit of time for everybody to join. Looks like we're up to about 19 participants who are expecting many, many more. So welcome to the webinar. And today's focus, as we will discuss in a minute, is going to be primarily on interest rates and currencies. And we'll be talking also a little bit about gold, maybe a few minutes about equities as well, since all of these markets are very, very closely interconnected. I see the numbers of participants are still climbing up to 21. So I'm going to give it maybe another minute or so before we really, really launch into the webinar. But in the meantime, I'm going to begin sharing my screen. That way we can get the, we can get everything ready, I hope. Here we go. Yes. All right. Well, I think the number of participants now is holding pretty steady. So I'm going to, I'm going to begin if that's okay. Yes, as we mentioned, I'm Eric Norland from CME Group, where I work as senior economist. And today we're going to be doing essentially two things. We're going to be first talking about the economics, mainly of fixed income and currency markets, but a few mentions for gold and equities. And then I'm going to turn things over to my colleague in Chicago, David Gibbs, who has very, very deep expertise in explaining how the different futures markets work. In terms of their contract specifications, how investors can use those markets to gain exposure or to hedge risk using futures contracts. So as we begin, I do have to show you both the short version, as well as the longer and more detailed version of CME Group's disclaimers, which essentially say that because we are an exchange operator and not a broker dealer or an investment bank, we cannot give you any financial advice. So no financial advice is given or intended. Now, with that in mind, the interest rate markets, I think, are really at the very, very core of all the finance. They are the thing that determined the discount rate at which all other assets in the economy are valued. And so that includes, of course, equities. It also includes real estate. It also includes commodities and other kinds of assets. So what happens with the level of interest rates is incredibly important, even if you're not investing in interest rate markets. And we can see here, for example, in this chart, which I think I've shown before in presentations with Tick Mill, but I thought we would begin with it, which is that the U.S. equity market's valuation level is inversely related to the level of interest rates. When long-term bond yields are very, very low, like they were, say, during the 1950s and 1960s, and like they have been in recent decades, the equity market can support very, very high levels of valuation. By contrast, when bond yields are very high, like they were during the 1970s and 1980s, the equity market's valuation levels tend to be very, very low. And so you can see that something happened here in the last year, in the last year and a half, let's say. Since the equity market peaked at the very end of 2021 or the very beginning of 2022, the S&P 500 has had this enormous correction. By the same token, long-term interest rates have been going upwards. So even in the very recent experience of markets during the last 16 months, we have seen this strong inverse relationship between interest rates and or bond yields and the valuation of the equity market. And I think we're seeing the same thing now in real estate. Interest rates have soared all around the world, as we'll talk about, and now real estate values are starting to come back down. And so what I think is really, really interesting here is that for 40 years from roughly 1980 or 1981, up until about one year ago, up until the beginning of 2022, interest rates were largely on a one-way path. For the most part, they were going lower. Now, of course, there were little hills and valleys down on the way. But generally speaking, each high in interest rates was lower than the previous high, and each low in interest rates was lower than the previous low. Well, now that cycle has been broken in a very, very big way. So now interest rates are the first time in many decades have now risen above their previous peak. Their previous peak was around 2000, late 2018, early 2019. At that time, the Fed raised rates to two and three-eighths percent. It seemed like a big deal at the time. Well, right now the Federal Reserve is getting ready, I think, to end a monetary tightening cycle. The will have taken rates up 500 basis points, which makes this its biggest tightening cycle since 1981, which is introducing huge risk into the interest rate market and by extension into a lot of other markets at the same time. So when you look up a little bit closer, you can see Fed funds is now at four and seven-eighths percent. It's probably going to go to five and one-eighths percent on the 4th of May, which I think is likely, although not certain, to be the Federal Reserve's last rate hike. The other interest rates are actually now trading below that. So we've now seen an inversion of the yield curve, and inversions of the yield curve are something that typically happens before an economic downturn. Now, I think a lot of people have a sort of stereotype in their minds, especially if they're equity traders or if they're commodity traders, that trading interest rates is boring because the prices of interest rates futures don't move very far. Well, let me tell you that's not necessarily true. When you look at our ultra-long bond future, which is the longest maturity of bonds that we offer here at CME Group, you're kind of roughly on the 25 to 30-year part of the yield curve. The future on that bond fell by roughly 50 percent off of its highs. So it's had a 50 percent correction. And it's actually a much bigger downside move than we've seen with the S&P 500. So anybody who saw the inflation coming and who fizzled forward in that market made a lot of money. They made more money doing that than they did by being short the stock market last year. And so then, of course, there's a question, well, why is all of this happening? You should also add briefly, and I'm sure David will elaborate on this, that the prices of bonds move inversely with interest rates. So as bond yields have been rising, the price of those bonds has been falling. So this is why you see the sharp decline in treasury long bond futures, even as interest rates have been going higher. So why has all of this happened? Well, it's very, very simple. It's because we've seen this incredible surge in inflation. From 1994 until the beginning of 2021, inflation was very low and very stable in the United States and Europe and many other countries in Japan, Australia, Canada. And then suddenly across all of these countries, inflation suddenly jumped up to around four and a half percent on the core PCE, which is the Fed's favorite measure of inflation, or even around five percent by that measure, which is the highest rate of inflation that the U.S. has experienced by that particular measure since 1981. So suddenly we've come out of a quarter century of very, very low inflation and moved into a period now of much, much higher inflation. So why is that happening? Well, I think it's happening for a variety of reasons, but there's one really big reason that none of us can ignore, and that's government spending. When you look at government spending in the U.S. from 1983 until 2019, it was largely pretty stable at around 20 percent of GDP. Sometimes it was a little lower, like under Bill Clinton, for example, it fell to 16 percent of GDP. At the end of the bush in the beginning of the Obama administration with the global financial crisis, it rose briefly to 24 percent of GDP, but then it came back down to 20. You know, under President Trump for the first three years, it was going upwards, but at a very gentle pace from 20 to 21 percent. But then suddenly with the pandemic, it rose to 35 percent of GDP. Then it came down to some of those programs expired. But right now, today, in the last 12 months, it ended on March 31, government spending was 25 percent of U.S. GDP. That's about four or five percent more than it was pre-pandemic. And as you can see, there's a huge gap between government spending and government revenues. So the U.S. budget deficit is now seven percent of gross domestic product, which is huge. So all of this created a huge, huge amount of demand, but it didn't create any new supply. And it is probably the most basic law of economics, that when you expand the plie but you don't expand demand, you wind up with higher prices. And so that's what's happening in our economy. But there's other reasons as well. You know, for many decades, the United States and other countries are entering into free trade agreements, sometimes at a global level through GATT, the General Agreement on Terrorist and Trade, or through the World Trade Organization, which essentially is the replacement for GATT, or even on a more bilateral or group basis, you know, like NAFTA, for example, CAFTA, the European Union's creation, et cetera. And all of this was very, very beneficial in terms of lowering consumer price inflation. But now the world is moving away from free trade. So we're now trying to move production out of places like China and putting it into countries that we perceive as being friendlier to our interests. So we're un-storing, near-storing, friend-storing. All of this is very inflationary. And then finally, with Russia's invasion of Ukraine, Europe and the United States and many other countries are now raising defense spending. So defense spending is also very inflationary. One reason why we had low inflation for the past quarter century is that the Cold War was over, so we could all spend less money on defense, which means we could create more consumer goods, more services. But now this is moving back towards defense. So as a result of this, we've seen a very, very sharp rise in inflation in the United States and in many, many other countries, as we'll see. In the United States, the median good in consumer prices is now rising at 7% per year. A large part of the reason for that is that 34% of the consumer price index in the U.S. is owner's equivalent rent, which is essentially a measure of housing costs. So rents in the United States are soaring, and that's taking housing cost up by 8% on a year-on-year basis measured through rents, not through the price of buying, but through the price of renting. And of course, the United States is not unique. Here in the United Kingdom, we got shocking inflation numbers this week. We saw 6.2% core inflation, which is stunning. The Bank of England has its rates at 4.25%. So the Bank of England's rates are more than 2% below inflation on a core level. The headline inflation is 10%. They have their rates at 4%. We could see tremendous more increases in interest rates here in Europe. Same thing is true in the Euro area, which of course includes Cyprus. Their European core inflation is at 5.7%. The ECB just got its rates to 3.5%. They're 2.2% below the rate of inflation. So they probably have a lot further to go in terms of hiking rates. The Federal Reserve has been a bit more proactive in the Bank of England, but they still have their rates below the rate of core inflation. So as I mentioned, they're currently at 4.78%. I think it's very likely, as we'll discuss in a second, that they're going to go to 5.18% on the 4th of May at the next big Fed meeting. But that will still leave them short of core inflation in the US, which is at 5.6%. So it's not even clear that central banks have tightened policy enough to stop inflation. So the huge interest rate moves might not even be over. Now, the interest rate markets themselves are like expectations machines. So we have a lot of different short-term interest rate features. One of them is the Fed funds feature, which is a huge feature. It trades maybe 600,000 contracts per day. It's a very, very deeply liquid market. And Fed funds features allow you to take a position on every individual Fed meeting for the next couple of years. What that market is now telling us is that there's about an 88% chance using one of my favorite pages, CME's Fed Watch Tool, where it calculates the probabilities of different meetings. If the Fed's going to raise rates another quarter point on the 4th of May at that point, the market for the moment thinks the Fed has done. And it's going to keep rates on hold through the summer. And then this fall is going to start cutting rates and eventually cut 200 basis points off of rates. I don't know. We'll see. So the market thinks that, you know, Fed funds is getting near its peak and the Fed's soon going to start cutting probably later this year and next year. There's another feature that's much more recent. It was launched just a few years ago. This is actually the biggest and most liquid market that trades at CME Group. It's called SOFR, the Secured Overnight Funding Rate. SOFR features are a little different than Fed funds. They're not a pure play on the central banks policy, but they're pretty close to that. They're essentially the rate at which banks lend money among one another. And so this is a gigantic future. Brilliance of dollars of derivatives, hundreds of trillions of dollars of derivatives are linked to SOFR futures. SOFR futures probably trade three to six million contracts per day. It's a very, very deeply liquid market. It has a gigantic open interest. And it too, prices of the Fed's going to hike as one last time. And then it's going to cut rates down to around 3%. Now just bear in mind, this is just the market expectation. This market expectation can and will change and it can change very, very quickly. Now interest rate markets are very closely linked to the price of gold. We could talk about gold very, very briefly. It's not the main subject today, but it is a sort of de facto currency. So we're going to kind of transition to currencies through talking about gold. Gold, as I'm sure you saw, is having kind of a bad day-to-day. And part of the reason for that, kind of a bad week actually, it got up near its old record high, around $2,080 an ounce. And now it's come down to just below 2,000. Why is it coming down? Well, it's been coming down, I think largely because interest rate expectations over the last week have started to move back up, in part because of that terrible inflation number we got from the United Kingdom, as well as some just generally fairly strong data out of a whole bunch of different countries. And so the price of gold really does not like higher interest rates. When the market comes to expect higher interest rates, it tends to depress the price of gold. So this week we had some backup, some rise in investor expectations for what the Fed is going to do. And that wasn't particularly good for the gold market. So gold and silver tend to have a negative correlation to changes in expectations for Fed rates. And the same is true for the US dollar. Gold does not like a strong dollar. It has a very, very negative correlation with the US dollar. Why? Well, it's because gold is a sort of de facto currency. It is a currency that pays zero interest rates, but it's a currency that all the central banks use. And the US Federal Reserve is the world's biggest single owner of gold. They have a huge, huge pile of gold that they sit on. All of the world's central banks, whether it's Russia, China, Venezuela, the United Kingdom, Germany, France, Japan, they all own gold as part of their currency reserves. The gold not only doesn't like a higher interest rate, it also doesn't like a stronger US dollar. Well, by definition, if the US dollar is going up, other currencies have to be going down. So gold actually, in a sense, behaves a little bit like the Euro or the yen or the Canadian dollar. When the US dollar is strong, all of these other currencies, by definition, have to be weak. And typically, gold is weakening along with them. And by contrast, when the dollar goes down, like it mostly has since the month of September, the price of gold and other currencies, by definition, has to be going higher. So the Euro also doesn't really like higher Fed rates. As you can see, the Euro US dollar exchange rate is also negatively correlated to changes in our Fed funds futures. So even if you're not trading Fed funds futures, if you're a currency trader, it's still very, very interesting to look at what's happening in these interest rate markets. And so in the interest rate markets, we have the concept of rate differentials between countries. So in the United States, the main interest rate benchmark for short-term rates is SOFR, which we mentioned is Secured Overnight Funding Rate. In the Euro area, the main benchmark, which also trades at CME, is Ester, which is also a brand new thing that replaced the previous one, Eurobore, just like SOFR replaced Euro dollars. And so when you look at the US dollar exchange rate, which you see in the right-hand chart in light blue, you can see that it tends to vary with interest rate differentials. When the US is raising interest rates more than Europe is, the US dollar tends to go up versus the Euro. When Europe is raising interest rates more than the US is, the Euro tends to gain strength versus the US dollar. There are also other influences on currency markets as well. Among the other influences on the currency markets include something we discussed earlier as well, the budget deficit. Currencies don't like budget deficits. When currencies see a budget deficit in one country becoming bigger and another country becoming smaller, currency investors more often than not will buy the currency that looks fiscally more healthy to the one that has a smaller deficit. So you can see that between the US and Europe, if you compare the relative size of budget deficits, it has some correlation to the movement of the currency. When Europe looks fiscally healthier, which is the case right now, where Europe's deficits are shrinking and America's deficits are growing, the Euro tends to strengthen, which is what it's been doing for the last six months. In a couple of years before that, it was the opposite. The US deficit was shrinking faster than the European deficit was shrinking, and so the Euro was falling and the dollar was rising. The same thing is true with trade. We have the concept of trade surpluses and trade deficits. When a trade deficit becomes bigger in one country, but not in another country, that tends to weaken that country's currency. And when a country moves, say, from deficit towards surplus, that tends to strengthen a currency. So when you put all of these things together, the big influences on currency markets tend to be the relative size of budget and trade deficits, as well as the relative size of the relative differences in interest rate movements. There's one last factor I didn't share, which is relative growth rates. Currencies love growth. So when a country is growing more quickly than another country, its currency tends to strengthen. Right now, it doesn't seem to be such a big issue, because both the US and Europe are starting to see their economies grow less strongly as a result of all of these interest rate increases. There's a couple of final words on macroeconomics before I pass the baton to David. In the interest rate markets, we've seen this phenomenon of the inverted yield curve. So we now have long-term interest rates and below-short-term interest rates. To my mind, this is signaling very clearly that the United States is heading towards a recession. The same thing, by the way, is not yet true in Europe. The Bank of England, the European Central Bank, have been raising rates, but their yield curves have only gone to flat. They haven't yet inverted yet. So I think in the US, it's possible, very even likely, that sometime within the next nine months to 24 months, we'll see an economic recession. So that could be later this year, sometime in 2024, we could start to see an economic downturn. Now, typically, the GDP does what the yield curve does, but with a delay of about one to two years. So we began inverting the yield curve at the end of last year and the beginning of this year. To my mind, that signaled bad economic things going to happen in the US probably late this year, or in 2024. A lot of people do wonder, they wonder why it is that we've raised interest rates so much, and yet the economy keeps growing. Well, look, the Federal Reserve, if I'm right, and if the market's right, is going to get to its highest interest rate in a few days. They're going to get to their last interest rate increase in a fourth of May 2023. So that's two weeks from now, roughly, a little less than two weeks. If you look at the last times, that they finished raising rates, and you calculate how long did it take for a recession to start, well, they stopped raising rates in December 2018, and we started a recession 14 months later. Now, I have to say, this is a bit unfair because that recession was only caused by COVID lockdowns. Had COVID lockdowns not happened, we don't know what would have happened to the economy. Maybe a mild recession, maybe not. But the Fed stopped raising rates in June 2006. A recession did not technically begin for 17 months later. The Fed stopped raising rates in May 2000. That time, it took 10 months for an economic recession. And then lastly, the Fed stopped its 1980s rate hiking cycle, the end of the 80s tightening cycle in February 1989. That time, it took 17 months. It was not until July 1990 that a recession began. And even then, it might not have begun had Saddam Hussein not invaded Kuwait and sent the price of oil much, much higher. So, yeah, the Federal Reserve is getting ready to end this rate tightening cycle. I think it's very, very likely that this is going to expand volatility in markets. It's going to make markets very, very volatile because we have an inverted yield curve. Typically, when you have an inverted yield curve, it takes liquidity out of the markets. You have much, much more volatility. And it's going to create huge opportunities for people who are trading in currency markets because different countries may go into recessions at different times. Central banks may not coordinate their actions. Like this time, the Federal Reserve raised interest rates much more quickly than the Bank of England or the European Central Bank. That could also be true on the way down. It's going to create a lot of opportunities in currency markets, a lot of opportunities in bond markets. If you want the real volatility in bond markets, the real volatility is at the longer end of the curve. The most deeply liquid of the bond futures is the 10-year future, the classic 10-year. It trades huge numbers of contracts, millions of contracts per day. But we also have a classic 30-year that also is even more volatile because it's a longer duration asset. And we have a newer ultra long bond, which I showed you earlier. It's also a very, very liquid contract. There's a lot of very easy to trade contracts in both the currency markets where we have all of the major currency pairs. Same thing for longer-term bonds. They can be traded just as easily in futures as equities can or gold. And there's a lot of opportunities and a lot of risks. So if you're tempted to gain exposure at any of these markets, my colleague, David Gibbs, can give you some ideas about how you can do that safely, responsibly, in a way that meets your investment goals. So I will pass the baton over to my colleague, David. I'm going to stop staring my screen and I'm going to turn the mic over to him. Thank you, Eric. That was a brilliant setup. Thank you. Let me make sure that I can get my screen up. Let me know in just a second here. And while you're doing that, I just wanted to say that we have a Q&A. We have a Q&A section here. So if you're tempted to ask either David or I or any questions, please type them into the chat. And when David is finished speaking, we will answer your questions at that time. Brilliant. Eric, can you see the full presentation screen? Yes, I can. It's good. Okay, great. Thank you. And thank you for that introduction and setup. We're going to continue our conversation today, focusing on a relatively young collection of contracts at CME that trade on US Treasury contract or US Treasury yield curve futures. They're called Micro Treasury yield futures. And I have to begin also by stating that my presentation is meant to be educational and informative and is in no way to be construed as offering investment advice nor making trading recommendations. There are going to be a couple of examples of potential trade opportunities using these futures contracts, but that should not be construed as making recommendations. Erica says mentioned quite a lot about the macroeconomic environment in which bonds trade. It should be pointed out that the global bond market is huge. This is a relatively recent, but not totally up to date. Look at the global capital markets structure, but you can see the global bond market is about $125 trillion worth of issuance spread out all around the world. But as recognized on the left-hand pie chart, you can see that the US at almost 40% dominates most of the interest rate marketplace. If we were to cut that pie down further and just look at the US Treasury market or US bond market, almost 60% of the issuance is in US Treasuries. And because of this sizing, what happens in the US Treasury market is relevant to other and relative to other interest rate markets around the world. For example, because a lot of global fixed income benchmarks on which asset managers are many times pegged to or have to weight their portfolios to are based on the issuance and outstanding size of debts, because of the US Treasury's sizing in global marketplaces, it is necessarily a part of most large investment portfolios. In fact, there are a couple of benchmarks that measure this. Globally, the Bloomberg-Barkley's Global Aggregate Index, which is the index used by most global fixed income bond managers, the US Treasuries comprise roughly 36% of that debt component. So it's a major contributor to the index's valuation. And if you're in a US domestic benchmark, the Barkley's Bloomberg US Aggregate Index, it's even higher, more like 38%. So what happens in the Treasury market is meaningful within the interest rate world. Micro Treasury yield futures, what are they and how might they be used? Well, the first thing that we have to do is define what they are, and it might be easier to begin with what they're not. Micro Treasury yield futures are not micro-sized Treasury securities. They're not securities at all. And because it's a futures contract, it doesn't convey any rights of ownership. In other words, being long a micro Treasury yield futures contract conveys no rights of ownership. So you're not accruing any kind of interest like you would be if you own the physical Treasury bond. They are futures contracts. And because they're contracts, they contain certain rights and obligations to the buyer and the seller. And the details of those are outlined on our website, cmegroup.com, for all of our financial, as well as commodity futures and options products. The micro contracts are smaller versions of our standard US Treasury futures contracts. That's why we have the micro in their name. This is an example of a bridge or abbreviated contract specifications table for the 10-year micro yield futures. You'll notice they're quoted in yield terms rather than price terms. I'll get to that in just a second, but they're much, much smaller in terms of their sizing, which makes them accessible to self-directed retail traders. They're a financially settled contract, which means there's no physical delivery mechanism involved in micro yield contracts, which in many cases makes their pricing even simpler. The beautiful thing about these, especially for the retail trader, is that their contract design is very simple and therefore it's very elegant, very easy to use and understand. But again, because the futures contracts are not an asset, they don't require a full equity value payment at point of execution. If I were to go out, for example, and buy a million dollars worth of a Treasury bond, I have to pay the full value of that investment to take ownership of it. Futures contracts have an equity value representation or a notional value representation, and the amount of money required to position that risk is usually a fraction of the notional equivalent. The amount that needs to be posted is called performance bond, and in the futures industry that sometimes gets shortened to initial margin or maintenance margin. I want to point out that when we use the term margin in the futures markets, it's not the same thing as in the securities business. In the stock market, when you talk about margin, you're talking about using margin or borrowing money from a broker to buy on margin. In the United States, for example, there's a regulation called regulation T that allows investors, if they qualify with their broker, to borrow 50% of a stock at point of execution and borrow the other 50% through the broker loan rate. This allows them to pay the full 100% value of the underlying asset, but only put up 50% of it in their own cash, borrowing the balance from the broker at a rate of interest that's determined by that broker. So there's a... Excuse me. There's the initial cost, and then there's the borrowing cost. Pardon me. Margins on futures are slightly different. This is the amount of collateral that's required to put up... I'm so sorry. Excuse me. This is the amount of collateral that's required to put up to secure the open market position, and it's generally a fraction of the economic value or the financial equivalent value of the futures contract. If we consider the margins that that performance bond required on a micro-tenure and compare it to the margin requirement on the standard ultra-tenure futures contract, you can see that the micro-tenure futures have a significantly lower point of entry, financial point of entry, a much, much smaller initial margin requirement. And this is true for all of them, and we list four on any given month at the two-year, five-year, ten-year, and 30-year portion of the U.S. yield curve. But you'll notice that their margins are all very similar in terms of their dollar requirement. This is, again, a more distinctive, unique feature of micro-treasure refuges that we're going to learn about in just a minute. If we want to compare the micro-tenure futures to the classic ten-year futures contract, you'll see some rather starkly different comparisons. The pricing convention of the micros are traded in yield terms. I'm going to spend a little more time on that in the next few minutes. Our traditional standard treasury futures contracts trade in price terms. Micro-treasury futures are cash-settled. There's no delivery mechanism, where with the standard contracts, there's a physical delivery mechanism that takes place every quarter. And that's an important aspect of the pricing mechanics of that contract. The underline in the micros is the BrokerTech benchmark index value, which is published daily on CME's website, and is published for each of those tenors, as well as others. The underline in the classic tenures, the standard tenure contracts, is a basket of deliverable securities. So again, there's a much deeper, it requires a deeper understanding of the delivery mechanism to understand the pricing mechanics of the standard contracts. The dollar values of a basis point, or DVO ones are smaller on the micros than they are on the standards, and their tick size is also much, much smaller. The margins, as I mentioned, are a little bit smaller, and we only list two monthly micro contracts at a time, as opposed to three quarterly contracts in the standards. So let's get into the pricing mechanics of these micro-treasury contracts. Now, most of us that are familiar with the rates business know that treasury bonds and notes, while they trade in price terms, are usually referred to and thought of in yield terms. In other words, a rates trader thinks in yield terms, but if he's dealing in the cash or in the futures market, trades in price terms. Example, at the beginning of this year, the on-the-run US Treasury tenure note was the four-and-a-quarter percent of November of 2032, and on the 11th of January, they closed at a price of 104, 25-and-a-half, 30 seconds, and had a yield of 3.542%. What makes the micro-treasury futures different is that they trade in those yield terms. So on that same day settlement, the January ten-year micro-treasury yield futures settled at 3.545 as a price. So unlike a cash bond or in the standard treasury contracts where you have to do the conversion from yield to price, you don't have to go through that exercise with the micro-treasury futures because they trade in yield terms. The basis point is a common term that's used in fixed-income trading, and all the basis point is is one-tenth of a 1% yield, and it measures the financial change to a 0.1% change in yield. So 1%, 1.00, represents 100 basis points. So a 0.1 change in yield is a basis point change. These micro-treasury contracts have a minimum price increment of a tenth of a basis point, and each one of those minimum tick increments equals $1. So the dollar value of a basis point is $10 on all of these contracts, no matter where they sit on the yield curve. So the two-year has a ten-year basis point value, and so does the 30-year. That makes them distinctly different than both the cash and the standard futures market. You can get the underlying benchmark equivalent settlement values on our settlement value page under Treasury Analytics on our website. This is just an example of what you would see at the end of a business day showing the on-the-run yields of the treasuries at the two, three, five, seven, 10, 20, and 30-year tenors. We have futures contracts in micro-treasury yields at the two-year, the five-year, the ten-year, and the 30-year tenors. So let's consider how these might be used either for risk management or potential trading opportunities as people consider possibly taking advantage of, as Eric pointed out, more recently volatile activity in the treasury market. Let's consider a trader who's looking at probably one of the biggest economic indicators released every month called, it's based on the Bureau of Labor Statistics Employment Survey, sometimes shortened to the non-farm payroll report. It's usually released the first Friday of the month. And if we go back earlier in the first quarter of this year, that report was scheduled to be released on the 10th of March. If the trader thought in advance of that economic release that yields were going to fall from their current levels of three point, and this is on the 10-year Treasury tenor, from three point nine to six percent, the day before non-farm payroll, selling that futures contract at that level would position that trader in expectation of a lower yield. The next day, non-farm payroll was released and yields did fall as a result of that economic release. The 10-year, micro-treasurer yield futures contract for April expiration fell to three point seven one nine as a unit price, which meant that this trader made the right market call and should have capitalized on a short futures position as a result. Let's look at the P&L. Selling one of the 10-year for April expiration of the micro ten-year yield contract at three point nine to six, buying it back, covering the short position to remain neutral to the market at three point seven one nine resulted in two hundred and seven basis points or a two hundred and seven tick gain on one contract and at a dollar per minimum tick increment a two hundred and seven dollar profit. That's an example of how the contracts trade and behave in direct correlation to the yield on the respective treasury tenors. Another way to potentially take advantage of these various contracts and since we list four of them, a two-year, a five-year, a 10-year and a 30-year is to do what are known as future spreads, inter-comodity spreads, trading one futures contract against another, long and one and short and another. In the rates business, this would be known as trading the slope of the yield curve and this is very, very simple to do with micro treasury futures because they have the same basis point value or dollar value than a one. All of them equaling ten dollars so a yield curve trade could be done buying one and selling another on a one-to-one basis. What needs to be determined by the trader is what they think the change in the slope of the yield curve is going to be. Now, Eric mentioned that we've got currently in the United States in the treasury curve what's known as an inverted yield curve and that's represented on this depiction as that declining black line. That means that the yields at the shorter end of the yield curve are higher than the yields on the longer end of the yield curve and this is, as was pointed out, highly unusual in a normal economic growing environment. We have what's known as a normal or a positively upslowed yield curve with yields at the shorter end lower than on the longer end reflecting the time value of money and risk. We're currently dealing with what was already pointed out as a rather unusual economic situation resulting in the yield curve shifting as a result of changes in central bank policy in expectations about future central bank policy and also about changes in economic growth and development. So with that kind of volatility the yield curve in addition to yields in general is also volatile and it can be traded as a spread. If one wanted to look and use the micro treasury yield contracts to express a point of view about the yield curve in this case expecting the yield curve to invert further would involve buying at the short maturity and selling a longer maturity micro treasury yield contract in what's known as a dollar neutral or a one to one spread. And since they move in the same direction as yields it's very easy to determine what you want to do here. In this example the trader decides that they like a further inversion expectation and would be buying the two year and selling the 10 year contract one to one to express that point of view. If this were done on April 5th buying the April two year at an equivalent price of 3.703 and selling one April 10 year at 3.279 that represents a 42.4 basis point inversion in the two's tens yield curve a negative point 424 price spread in these contracts. This trader expects that number to go more negative as a result of this trade. And by the way because this is a relative value trade the trader really doesn't care whether that's as a result of the two year portion going down or the 10 year portion going up it doesn't make any difference because they're on a one to one rated ratio either of those scenarios would result in a greater inversion in the yield curve profiting the spread. If we look just a few days later on the 10th of April and look at those prices you'll notice that the two year has gone from 3.703 to 3.920 and the 10 year went from 3.920 to 3.416 The inversion is now negative 50.4 8 basis points more inverted so the trade does in fact make money making 8 basis points at $10 of basis points resulting in an $80 profit on the trade. Now it's interesting why would you choose one contract versus another well various economic events affect portions of the yield curve differently. The two year portion of the yield curve tends to be more dramatically affected by Fed policy expectations and decisions. The 10 and the 30 year portion of the yield curve tend to be more affected by more macroeconomic conditions longer term points of view. So that may have an influence on which contract you choose to use which interest rate you wish to follow or in some cases sometimes these yield curve trades depending on your point of view about the slope of the yield curve either way these contracts because of their elegance and their simple construction are gaining in popularity by particularly self directed retail traders who view them as a very very easy way to access trading in the active US Treasury market without having to take on that additional knowledge of pricing of the standard Treasury contracts and their delivery basket considerations and so forth. They also take considerably lower initial margin requirements than the standard contracts as well. If you are interested in tracking them as a charting or from a technical standpoint on our website if you go to the interest rate section and highlight the micro treasuries you can pull up a contract and this is the 10 year contract you can see them in their yield terms in which they trade but as a bar chart or there's lots of different selections on how you want to look at these things and I've shown in this example both the bar chart the volume and the open interest on a contract so if you tend to be technically minded you can track these from a technical standpoint using the charting feature on dot com Additionally, Treasury Analytics provides you with the benchmark settlements every day as well as additional information on the Treasury market both the standard and the micro contracts. Eric and I have both mentioned volatility there's another feature at CME that can be accessed through our options page that charts or allows you to look at the volatility as it's defined by the options trading at CME this is called C vol and you can see that from this screenshot you can either look at them by tenor or take the general Treasury volatility measurements either in yield which is probably the simplest to look at or the standard Treasury prices in price terms but this is another way to get additional information garnered from the data developed by CME group based on the actual trading of options on Treasury futures at CME so Eric I'm going to pause there I'll stop sharing my screen and we can go to any questions and that the audience has regarding either of our presentations All right well it looks like we do have three questions here in the chat let me see I'm testing a question here so one of the questions is Hi, so you mentioned some of the trading indicators that might indicate a recession in the U.S. for example inverted yield curve but the banks risk is controllable property market as risky as 2008 what is the fundamental cause this time do you think so that's a great question so I think every recession is different so no two of them are exactly alike the most recent one really big one that we had that wasn't caused by COVID was in 2008 that was a crisis of large banks on Wall Street combined with mortgage rates combined with mortgages you know in the housing sector in the U.S. I don't think we're going to have a housing crisis in the U.S. the vacancy rates for houses this time in the U.S. are very very low both for rental and for owner occupied properties so I don't think there's a housing crisis there in particular so I think that's going to be fine but I do think however U.S. is going to have a commercial real estate crisis when you look at commercial real estate which includes both office properties as well as properties used you know by stores and restaurants and things like that their vacancy rate has doubled it's gone from 12% to over 20% in the U.S. so you just have huge amounts of empty offices a lot of building of offices still going on and offices for who I don't know nobody needs to work in offices anymore I mean you can see very clearly David's not in the office today I mean I happen to be in the office but you know lots of people work from home then we have a crisis of office real estate and commercial real estate and I think that we're going to probably see a crisis of small banks in the U.S. which we started to see already with Silicon Valley Bank and Signature Bank and also to a lesser extent Republic Bank a lot of these smaller institutions have been losing deposits to bigger institutions I also think we're going to see a crisis in the technology sector we're already starting to see large numbers of layoffs at tech firms you know Facebook or Meta Google Microsoft, Apple all of them are laying off staff and so you're starting to see a really really big staff reduction there you're also seeing it for some of the Wall Street banks as well and look the tech sector can cause recessions we've seen it before in 2001 and 2002 we had the tech rec recession which is a recession involved a massive decline in the level of business investment and a huge huge rise in unemployment in the tech sector and Silicon Valley and I think that we're going to go through phase two of the tech rec recession it's going to look very different in 2008 and it's going to be more like a combination of the 1990-91 recession which was a crisis of small banks combined with the 2001 recession which was a crisis of technology companies and business investments but let me tell you we've come out of a period of zero interest rates or near zero interest rates that lasted for a long time in the United States it lasted from 2009 really until 2021 with the exception of that brief period when the Fed briefly got rates up to around 2% in 2018 here in Europe we've come out of a period of zero or in many cases negative interest rates now to the most steeply positive interest rates that we've seen in 15 years you have huge huge numbers of borrowers whether they're household who took out steep mortgage loans and I think by the way we're going to have residential real estate crises in certain places in Canada maybe in France and Britain and Sweden perhaps in Germany I think we'll see a lot of those kinds of crises we're going to see a crisis I think of venture capital firms private equity firms of all sorts of highly leveraged parts of the economy that became accustomed to borrowing interest rates and borrowing rates borrowing money at close to zero rates and now suddenly having to finance themselves at much much higher interest rates so look I think that this is going to be a really really big deal for the economy and I think it's going to be very painful and lastly I would think that in Europe we're very susceptible to having eurozone crisis part two the first eurozone crisis back in 2009, 10, 11 and 12 involved mainly Portugal Italy, Greece, Spain and Ireland since then some of those countries especially Spain, Ireland and Portugal have massively deleveraged and good for them but other countries like France, Belgium and Finland have used the zero rate period to dramatically increase their levels of leverage I think you could be looking at another crisis of euro area bonds which could also be a source of financial stress and economic downturn and I think that Mario Draghi was able to end the last eurozone crisis because in 2012 he said we will do whatever it takes to keep the eurozone stable and he was able to print a huge amount of money and lower interest rates to zero for one reason and that's because inflation in the euro area was close to zero now with eurozone inflation at 5.7% a successor Christine Lagarde does not have that option she has to raise interest rates because inflation is out of control it's not coming down at the core level it's actually increasing further at the core level and this is going to cause a lot of very painful decisions in Europe but you may wonder so why not a crisis already well it takes a long time for bonds and loans to roll into maturity to have to be refinanced but those who are coming into maturity to be refinanced now have to be refinanced at rates that are sometimes two, three times higher than what was the case before when the central banks had their policy rates at or in some cases below zero it's just going to cause a very painful reckoning in many many parts of the economy and truthfully we don't know who's going to blow up nobody knew at the end of February it's going to be the first to blow up all I can tell you is I don't know who's next but I know that those two banks were not the last do we have any other questions anybody wants to put in the chat I don't see any other questions there but maybe we should just give it a second do you have any last thoughts David instead of unmute yourself sorry I had to unmute there sorry no I think we've covered quite a lot regardless of what happens I think I'm fairly confident in saying I think the rates markets are going to continue to be very volatile and because of that that both creates pain for risk managers but it also creates opportunities for people that are willing to assume the risk and these micro treasury yield contracts allow that ability to take on exposure in a very simple product that's easy to follow and if you've done your homework correctly can provide some very nice returns so please consider that as looking into it as part of your investment toolbox thank you David I just see a couple other things in the chat window and it's just people thanking us for the presentation so first of all thank you for making us a part of your Friday evening here in Europe and third one that we've done with Tick Mill we did previous ones on the equity market and then one on commodity markets we're very very happy to work with Tick Mill we hope to meet you in person as I was able to do with many of you here at the start in London we look forward to hopefully working you with you yes sorry somebody pointed out it's night time in Dubai so anyway I wish everybody a good night a good afternoon a good evening depending on where you are in the world we hope to be back to do more webinars in the future so thank you all so much if you have any further questions don't hesitate to ask us go ahead David it says in the Q&A box regarding micro futures how do they affect currency markets a bit confused I don't think in this case the micro yield futures are going to have any impact on the FX marketplace but I think maybe Eric you might want to again re-emphasize how rates affect FX right yeah so if you have something which at the futures contracts themselves affects FX but when interest rates rise in one country versus another country it tends to push up the value of that currency so for example when the federal reserve started raising interest rates so much more quickly then the European Central Bank did that drew a lot of capital to the United States the US dollar soared until September what happened after that was the Fed began to slow down the pace of its interest rate increases just as the European Central Bank began to increase the pace of its rate hikes and that caused the currencies to go the other way the dollars started falling and the euro began to rise so I'll tell you one thing that's going to be very interesting here and that's the Japanese yen the Fed is probably almost done European Central Bank probably a little further to go the Bank of Japan is just now starting to think about doing something they're not going to be in May because they have a new chairman I think he wants to move on his first meeting but the Japanese yen is going to be a big one to watch here if the Fed goes on pause or starts cutting rates while the Bank of Japan starts thinking about tightening that could be very very bullish for the Japanese yen there's going to be a lot of interactions to watch between interest rate markets in Japan and Europe elsewhere in the world and interest rate markets in the US and how they impact currencies these markets are very very tightly intertwined so I'm sorry David do you have any other things no just another a couple of things that have been popping into the chat or the Q&A box I want to remind people that while Eric and I can speak somewhat objectively about economic conditions and specific financial strategies we're not allowed to give investment advice so please don't take what we're saying is it construed as investment advice or trading recommendations and then one question that's coming in here involves what happens when companies default during 30 or during 30 or 20 years I don't think that in terms of corporate defaults that involves more the corporate bond and corporate debt markets as well as bankruptcy law the only thing and this may be something to speak to Eric is the United States at least to date has not defaulted on any of its credit or any of its debt there is a little bit of concern about the debt ceiling coming up over the summer what do concerns about credit worthiness of treasuries do to yields yes that's very interesting yes there is a concern that the US government might default on its debt not for economic reasons but purely for political reasons over the course of the summer the US has kind of a strange system where Congress appropriates funds for how it sets the level of spending and it also sets the level of taxation and so the difference between the amount of spending and taxation is the amount of debt or deficit that gets added every year but Congress separately from that also sets a debt limit the debt limit for the United States at the moment is 31.5 trillion dollars which is if you wonder why we have so much volume in our interest rate markets is because there's so much debt that needs to be hatched that's why these are such big markets and why there's such liquid markets but anyway it's coming up to this 31.5 trillion dollars and in the United States we now have a divided government so we have a House of Representatives controlled by the Republican Party a Senate and the White House controlled by the Democratic Party and they are having a disagreement about under what circumstance the debt limit should be raised and so if they don't come to an agreement by sometime this summer we don't know exactly when they'll hit the debt limit it's probably going to be sometime between June and September I think it's going to be a bit on the earlier side personally then there's a possibility the US could default and just stop paying government workers stop paying government contractors and also not pay the coupons or the principal payments or the T-bills and US Treasury securities how this impacts the markets is very difficult to say we only have one real previous example where we had a close call and that was 12 years ago it was in 2011 and at that time the government was going to run out of money on August 2nd 2011 and they reached a deal at the last minute that should deal just before midnight that night that prevented the US government from defaulting but the markets were not amused by this so what happened was that the equity market fell about 20% on the S&P dropped 20% now ironically because equities were dropping the bonds stored in price so the yields were coming down this may be the opposite of what you would think you would think if the government is going to default or rise but because equities fell so much it created a flight to quality into government bonds I cannot guarantee you that that will be the case the second time it may or it may not be the case we could also see government bonds fall too I don't know I don't know what's going to happen the other thing I'd mention is that since the US looks so dysfunctional a lot of people sought refuge in gold for years and out so over the face of a few months around that time so equities fell 20% gold went up 20% bond yields fell and bond prices by definition rose but how this turns out in 2023 I have no idea I don't think anybody has any idea I don't think the Republicans and the House of Representatives know because I don't think they're all on the same page I don't think they want to ask for from the Biden administration I don't think the Biden administration necessarily knows exactly what they would be willing to do to prevent a default from happening so I don't think anybody on Wall Street knows either so another question is kind of related what is the time scale when the US government has to raise the debt ceiling so the time scale is going to be sometime between June and September so nobody knows precisely yet what the exact day is when the government will run out of borrowing authority but I think we're going to know pretty soon so part of the reason why we're going to know soon is that Americans have to pay all of their taxes usually by April the filing deadline for taxes in the US is April 15 as you see David laughing not a fun day for Americans and so there's always this question how much money does the government collect as a result of the April filing deadline I saw a report on Bloomberg that said the number was pretty low this year it was around 100 billion extra or so that the government got I don't know if that's a final number we may have to wait a month or so until the middle of May before we get all of the final receipts but if that number comes in low the time scale of when the US government has to raise the debt ceiling probably towards June rather than July, August, or September so this could be coming up very very quickly and it could be a really really big mess and another question is it better for a US financial market if Trump is president again well I actually have a lot of slides on this on a different deck I didn't put them into this deck it's a very complicated question generally speaking the equity market has generally done better when Democrats are in office and Republicans but it's complicated and there's a reason for that that's very subtle is because Americans like divided government and so what usually happens and we have a Democratic administration like Clinton or Obama or now Biden is the Republicans wind up taking over one or both parts of Congress and when you have a Democratic president and a Republican Congress what you tend to have is a lot less government spending which is what the Republicans are trying to achieve here they're trying to negotiate for lower government spending which typically is good for equity markets you know by contrast when you have a Republican president often you wind up in the end having a Democratic Congress and that was the case for the last couple of years of Trump that was the case for the last couple of years of George W. Bush and it was the case all throughout the Reagan Bush administration back in the 80s and early 90s all throughout the Eisenhower and Nixon administrations and so what happens when you have a Republican and Democrat a Republican president and a Democratic Congress you often wind up having huge amounts of government spending and also sometimes tax cuts too you wind up with bigger government deficits under a Republican president like Trump governing with Democratic Congress then you do in the opposite situation with a Democratic president like Obama, Clinton, or Biden governing with a Republican Congress so that's what history tells us but I'd also warn you to take it with a grain of salt because what the two parties stand for changes over time the two parties are not ideologically stable institutions you know like Reagan was very different than Nixon and Eisenhower and Trump was very different in some ways than Reagan or Bush you know and likewise Biden is not necessarily a centrist like Clinton or Obama were he's maybe a bit more to the left so it's you know it's very tricky to look at party control you know under it was under Trump that deficits really began to expand you know when Trump came in budget deficit was two and a half percent of GDP by the end of his third year just before the pandemic it hit five percent of GDP and by the time he walked out of the White House it was 20 20 percent of GDP and largely because of the COVID spending but you know it's it's hard to say because right now we have expanding deficits under Biden and part of these interest rates are soaring the government has a gigantic debt of over 100 percent of GDP when interest rates were zero the government could finance that almost for free now interest rates are adding to five percent so the cost of financing is gigantic debt is becoming really really big it's going to create a lot of problems for the US and I have to say it's going to create a lot of problems for Europe for Canada and for Australia all of you are in more or less the same situation all this free government financing of debt is just over because of inflation and this is a really big story that's going to haunt us economically throughout I think the entire 2020 and maybe beyond and it was not a very optimistic note to end on on a Friday night I don't see any do you have any other thoughts on that David other than volatility could be viewed as being optimistic if you're in the trading business so regardless of what happens I don't think anyone has a clear picture and that's exactly why CME exists is to help people manage risk so I would just close with my own thoughts as saying thank you for your attendance and your participation and we look forward to future webinars with Tick Mill thank you Eric for your wonderful expertise in this area and our hosts at Tick Mill thank you very much you all good good afternoon good night good evening all right cheers bye