A 30,000 foot view of debt instruments -- Bills, notes and bonds:

 What are they?

 Auctions and the secondary market
 The futures market
 Price and yield
 Putting together a futures chart
 Where they trade
 Contract months
 What those symbols mean
 Price representation
 Debt instruments of the UK and Germany
 Working with barchart.com
 Links / resources
What are debt instruments => Bills – notes – bonds?

 They are securities issued (auctioned) by the US Treasury that:

1. Allow the government to borrow money (create debt) from foreign
governments, corporations, individuals, etc.
2. Come in increments on $100.
3. Give the holder a fixed, semi-annual, income in the form of interest and at the
end of the security’s term can be redeemed for its face value.

 At various times throughout the year, the US Treasury auctions various instruments
including bills, notes and bonds. This is the primary market.
 After those instruments are issued they are then bought and sold on the secondary
market and is where the trading is.

 These debt instruments come in three flavors based on length to maturity.

 Bills – Under 1 year
 Notes – 2, 5, 7 and 10 years
 Bond – 30 years
Notes, bonds and the futures market

 Notes and bonds are considered safe investments – One gets a steady income,
albeit small, with the added comfort of government backing.

 The longer the term, the higher the interest paid on the face value. A 30-year
bond will pay the bearer, say, 3.5% annually, whereas a 10-year note may pay 2.5%
and a 5-year note, 2%.

 Notes and bonds, but not bills, trade in the futures market on the Chicago Board of
Trade and are used hedge and speculate alike.
 Additionally, the grade, or quality, of the instrument must meet certain
parameters as well, e.g. the 30-year bond must have at least 15 years to
maturity, but no more than 25 on delivery month.
 Since notes and bonds, when issued, have varying interest rates and terms to
maturity, a conversion formula is used to deliver consistent quotes.

Key point and something to consider when doing analysis. Which ones
are likely to be sold first? Which ones are likely to be purchased first?
Price and yield

 Notes have maturity of 2, 5, 7 and 10 years; bonds 30 years. They are auctioned on
a regular basis, although you can purchase these instruments on a non-competitive
basis as well through Treasury Direct.
 Remember, when I buy a note or bond, the face value does not change, nor does
the interest of x% (whatever that may be) paid to me over the life of the instrument
on that face value.
 Simplified example of yield:
 Suppose I purchase a $100 bond at auction for exactly $100 and with an
interest rate of 4%. I’ll receive $4 interest annually and in 30 years I’ll get my
$100 back. My yield is also 4%. Safe, secure, modest return.
 I sell this bond to Cindy for $98. Cindy receives that same 4% interest annually
from the US government on the face value of $100, but since she only paid
$98, her yield is 4.08% and she can redeem the bond for the full $100 at term.
 Cindy sells to Jake for $105; yield = 3.8% or $105 / $4.

 Higher prices equals lower yield and vice versa.

Putting together a futures chart: Symbol

 Treasury futures like all others have some basic component that comprise them:
 Where they trade => Chicago Board of Trade
 Contract specifications => http://www.cmegroup.com/trading/interest-rates/us-
treasury/30-year-us-treasury-bond_contract_specifications.html
 Contract delivery months (when they expire) Identified with a letter code =>
Bond and note contract months are March (H), June (M), September (U) and
December(Z)
 Symbol => Bond (ZB), 10-year note (ZN), 5-year note (ZF), 2-year note (ZT)

 A complete futures symbol will have as its components SYMBOL | CONTRACT

MONTH | YEAR. The bond futures contract for March, 2017 would look like
ZBH17. However …Platforms vary and the symbols may be different to suit that
data provider’s feed. Double check!
Putting together a futures chart: Price

 Bond and notes come in various sizes, in increments of $100, with a minimum
purchase of $100 to a maximum size of 35% of an auction’s offering. The value of
the instrument is referred to as face or par value.
 Maria buys a $1000 10-year note at auction and Emma buys one with a face
value of $20,000.
 Both of these can trade in the futures market, but since they have different face
(par) values, quotes are expressed as a whole percentage or points of par plus
a fraction of percent / point (instrument dependent) versus actual price.

 Don’t be concerned over the semantics of bond / note quotes. If it helps, just think
of every instrument as originally being sold for $100 and the quote would represent
current “price” in dollars and fractions of dollars.
 Additionally, quotes may take different forms; i.e. 120-215, 120’21’5 and 120-215/64
are the same.
Putting together a futures chart: Price

 From the CME website: Contract quote specs for three instruments:
 5-year note => Points ($1,000) and quarters of 1/32 of a point. For example,
119-16 represents 119 16/32, 119-162 represents 119 16.25/32, 119-165
represents 119 16.5/32, and 119-167 represents 119 16.75/32. Par is on the
basis of 100 points.

 10-year note => Points ($1,000) and halves of 1/32 of a point. For example,
126-16 represents 126 16/32 and 126-165 represents 126 16.5/32. Par is on
the basis of 100 points.

 30-year bond => Points ($1,000) and 1/32 of a point. For example, 134-16
represents 134 16/32. Par is on the basis of 100 points
In this example, the quote
comes in at 124’25’5 or
124 whole points PLUS
25/32 points PLUS
5/64 points

Could have been

represented as 124-255 as
well
Debt Instruments of the UK and Germany

 With the UK we have the Long, Medium and Short Gilt which trade on the ICE
Europe. The Long Gilt has a base symbol of “R” and quotes a bit differently than a
US futures symbol – So, the 10-year Long Gilt contract for December 2016 would
look like: RZ2016

 The Euro-Bund, Euro-BOBL and Euro-Schatz are the Long, medium and short
instruments issued by Germany and their futures contracts trade on the Euro
Exchange. The bund symbol is FGBL => December 2016 contract would be
represented as: FGBLZ2016
Debt Instruments of the UK and Germany

 With the UK we have the Long, Medium and Short Gilt which trade on the ICE
Europe. The Long Gilt has a base symbol of “R” and quotes a bit differently than a
US futures symbol – So, the 10-year Long Gilt contract for December 2016 would
look like: RZ2016

 The Euro-Bund, Euro-BOBL and Euro-Schatz are the Long, medium and short
instruments issued by Germany and their futures contracts trade on the Euro
Exchange. The bund symbol is FGBL => December 2016 contract FGBLZ2016
Debt Instruments of the UK and Germany

 With the UK we have the Long, Medium and Short Gilt which trade on the ICE
Europe. The Long Gilt has a base symbol of “R” and quotes a bit differently than a
US futures symbol – So, the 10-year Long Gilt contract for December 2016 would
look like: RZ2016

 The Euro-Bund, Euro-BOBL and Euro-Schatz are the Long, medium and short
instruments issued by Germany and their futures contracts trade on the Euro
Exchange. The bund symbol is FGBL => December 2016 contract FGBLZ2016
 Working with barchart.com

 Below are the symbols used to create a well-formed debt instrument futures
contract found on barchart.com. Note that all contacts have delivery months for the
end of each quarter. This applies to currency futures as well. Also note that the
contact code may be different from the code used on the exchange they are traded.
Barchart.com Contract
Contract Year
Contract Code Months
30-Year Bond ZB H, M, U, Z 2-Digit Year
10-Year Note ZN
5-Year Note ZF
2-Year Note ZT

Euro Bund GG
Euro BOBL HR
Euro Schatz HF

10-Year Gilt G

Futures contract month codes

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
Code F G H J K M N Q U V X Z
 Working with barchart.com

You can either type in the contract directly to get its info

Or use the drop down menu

See ICT Sniper #3 – Starting about 1 hour in for more, including accessing bond
yields on Bloomberg!
http://theinnercircletrader.com/Tutorials/Sniper/Sniper_3.mp4
Futures contract month codes
JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
Code F G H J K M N Q U V X Z
Links:

 CME group - US futures: http://www.cmegroup.com/trading/interest-rates/us-

treasury/30-year-us-treasury-bond_contract_specifications.html

 CME group – Informational PDF:

https://www.cmegroup.com/education/files/understanding-treasury-futures.pdf

 The ICE – UK Gilt: https://www.theice.com/products/37650336/Long-Gilt-Future

 Euro Exchange – German instruments: http://www.eurexchange.com/exchange-

en/products/int/fix/government-bonds

 Quandl – Futures info: https://www.quandl.com/collections/futures/

Links:

 Barchart US financial futures: https://www.barchart.com/futures/financials

 Barchart European financial futures:
https://www.barchart.com/futures/european/financials
December 02, 2016