USD Rates — What's new?
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Ali Curi: Hi everyone, and welcome to ION Markets Quick Takes. I'm Ali Curi, and every week, along with my guests, Amir Khwaja and Chris Barnes, we take a quick dive into the headlines on the Clarus blog.

Let's get started. Hi Amir. Hi Chris. 

Amir Khwaja: Hi Ali. 

Chris Barnes: Hey Ali. How you doing?

Ali Curi: I'm doing great. Welcome back to Quick Takes.

Chris, let's start with you. What's your Quick Take for this week? Which headline from the ClarusFT blog would you like to discuss? 

Chris Barnes: All right, this week I'm going to try and talk about everything that's new in dollar rates. I wrote this blog at the very end of August. And so I was kind of expecting color in dollars to be, well, it's August, it's a quiet summer markets, let's say I give a proper update on what's happened in Q1 and Q2. And I thought it would be a rather formulaic blog. I couldn't have been more wrong. I don't know how it passed me by really, but when I actually went to look at the data, August looks like it was an all time record month for trading in dollar rates.

We have multiple sources of data. This is all from our app called CCP View, brings in data on US treasury trading, on bond futures, and on OTC swaps, you sum them all up and August 2024, as bizarre as this sounds, was a record month for volumes traders. $1.68 trillion dollars is now the average daily volume in Q3 so far across dollar rates. That basically means that every month we've got more than $30 trillion dollars trading. The numbers in notional equivalent are just crazy. And yet something not in the blog that we've talked about frequently this year is that Euro rates are bigger than dollar rates, right? And so I do think it's just worth stating at the outset that when we talk about Euro rates being bigger than dollar rates, what we're talking about is only swap markets.

The futures markets, the treasury markets in the US, are orders of magnitude bigger than Europe. If you really want a sound bite, you know, dollars is still the daddy. It's still the biggest market out there. It's still the easiest market to move really large amounts of risk through. And so, I don't state that explicitly on the blog, but I think it's something that's really worth bearing in mind.

Now, translating the blog into a podcast, I'm going to admit it is a bit of a challenge because it's a bit like one of those blogs where you scroll down, chart, interesting bullet points, scroll down, chart, interesting bullet point. The structure is generally that we look at total global volumes traded for dollar rates, they're up.

And then we try and look at that, looking at which of the different products, bonds, bond futures, or swaps has seen particular amounts of growth. And so the headlines from an asset class perspective, let's say, we're actually at the very bottom of the blog. We look at long dated US cash bonds, they've grown the volumes by 51 percent in the past year alone. It's a huge amount of growth. 

When you look at the 10 year area of the curve, bond futures have grown by 43%. The only area that we really see is struggling, let's say, are long dated swaps. It looks like long dated swaps and where I say long dated, I mean anything over 15 years. They're now the least traded asset class in the long area of the curve. Volumes have reduced from 26 percent of the total 22 percent of the total for swaps. And so whilst when you look at the CCP data alone, you'll see that volumes are growing relative to the performance of bond futures and treasuries, they're actually underperforming.

And I think that's an important structural facet of the market to be aware of. You know, it seems to be that we're on this constant path of volumes, increasing and increasing and increasing. When you look at the swap clear franchise, for example, and dollar rates performs, it always looks really, really impressive.

I'm sure that it's driving revenues for them as well, but you need to look at that in perspective of what other areas of dollar rates are doing as well. And when we run this analysis, I think this is the third type of blog I've done, which has looked holistically across treasuries, bond futures, and swaps.

It seems to be that bond futures are really where the volumes are growing most. And obviously bond futures, they're a very standardized product, they're very fungible, there's lots of netting, it's a really efficient product. Fundamentally, it has lower initial margin because span is generally done on a one day MPOR as opposed to five days for OTC.

We've also, though seen lots and lots of press around, about the basis trade, and about hedge funds in particular, being active in bond futures versus the repo for the cheapest to deliver. And so there are aspects here where we don't have full visibility of what is driving the risk here. We might see that there is, let's say, more outright risk in swaps, and some of the increase in volumes we've seen in bond futures is more being driven by basis trading.

So there are a lot of subtleties here. Amir and I have recently done a podcast on CCP disclosures. CCPs give us very granular data on open interest. That gives us an idea of the risk that lives in the franchise. They give us granular data on initial margin. That is another measure of risk. One of the things that these type of blogs highlight is that yes, we see the notional amounts of volumes which they trade, but that doesn't necessarily translate into how much risk is actually being transferred and put on in each of these areas.

On that note, Amir, do you have any specific questions on the data or dollar rates generally? 

Amir Khwaja: So I must say this is a blog I look forward to. I really like these charts where you split up cash treasuries, bond futures, and swaps. I think those are nice, interesting trends. I guess it is surprising to me that swaps are not doing well on 30, because you always think of swaps as a long dated product, but maybe long dated swap market is no longer 30 years, maybe it's 10 years. 

I guess the participants that do swaps we know they're more expensive from a balance sheet, capital usage from margin requirements, et cetera. There might be some headwinds there, right? Or simply investors are now more keen on 30 year treasuries. So I'm not sure what's happening in the marketplace. 

But one thing I wanted to ask you was that of these markets, the bond futures are a 100% cleared, but your swap bars are mostly cleared, maybe 85-90%, 90%, right? But the cash treasuries are probably 20-30% type cleared.

So do you envisage when, and if that market moves in a big way to clearing, it'll make cash treasury more attractive? 

Chris Barnes: You would think so, yes. It would certainly make sense that more of the market is cleared and more of the market is for example, cross margin versus CME. It's just, it's, as we know from following the swaps data back in the day, it's really, really difficult to know how quickly these changes will flow through. The reality of regulations, as we saw in swaps was that the clearing mandate when it first came in, hits counterparties who were already clearing, largely. And so, yes, it increased volumes, but it didn't have that follow on effect that we've seen in the past three or four years.

Whereby everybody is clearing the major currencies already. And so we're seeing an explosion in clearing volumes of minor currencies now, because it's largely initial margin neutral for them. I don't know how that will play out in a similar way for treasuries, whether you're talking about knock on impacts between on the run and off the run, or whether it's multi-currency or multi-product, I have no idea.

But I do think that following the data will be a very interesting space to be in over the coming years. 

Amir Khwaja: Thanks, Chris. And I guess the other thing I'd point out, I don't recall exactly, but we know CME have improved the bond future contract in terms of the underlying deliverables. 

Chris Barnes: It's a great point.

Amir Khwaja: Became quite short, at some point, on the treasury bond, and then they became more like what they're meant to be by design. So I guess, launching products doesn't make the ETD franchise more attractive, right? 

Chris Barnes: Exactly. And for bond futures, they've launched what, Ultra 5, Ultra 10 and Ultra 30.

So far, you can imagine along the line, there'll be an Ultra 7 and Ultra 6 maybe, which is then a direct choice of trading the bond future or the on the run. Also creates more curve trading, which creates more volumes. And so it is difficult to disassociate the growth in volumes from the growth in product offering as well.

Amir Khwaja: And I think we should point out, we shouldn't forget, now it occurred to me, there's also the mini-micro contracts. 

Chris Barnes: Good point. 

Amir Khwaja: Which we know have been very successful, at least in the S& P space, but I believe they also got as successful in the rate space. 

Chris Barnes: Agreed. 

Amir Khwaja: Great. Thanks, Chris. 

Chris Barnes: Pleasure. Ali, back to you.

Ali Curi: Thank you, Chris. And please share with us again, the title of your blog post. 

Chris Barnes: The title is, "Dollar Rates — What's New?"

Ali Curi: Short and sweet. That works.

Amir Khwaja Chris Barnes. Thank you both for sharing your Quick Takes. Let's do it again next week. 

Amir Khwaja: Thanks Ali. 

Chris Barnes: Thanks Ali. See you next week. 

Ali Curi: And that's our episode for today.

You can read more about these topics on the Clarus blog, and you can follow ION Markets on X and on LinkedIn. 

Thank you for joining us.