T-Bill auction mechanics
T-Bills are auctioned based on a pre-announced schedule with 13-Week Bills typically offered weekly. The timeline for the 13-Week series sees auctions announced on a Thursday, usually to take place the following Monday, and settle on the following Thursday. In the event of federal holidays, auctions take place on Tuesdays, though settlement remains on the following Thursday.
T-Bill auctions are based on discount yield rates, meaning that investors submit the discount to par, in annualized percentage points, that they are willing to pay to buy the bills. All investors are allocated the same rate, which is known as the highest accepted rate. An investor will be successfully allocated T-Bills at auction if they bid a rate that is lower than the highest accepted. For example, an investor interested in 13-Week T-Bills may decide that they are willing to pay 5.25% below par. If the Treasury accepts bids up to 5.34% as in this auction result, then the investor will be successful with their bid, thus receiving a discount yield of 5.34%. In this example, the investor would pay $98.6501671 per $100 of T-Bills allocated.
Discount yield differs from money market interest rates. A discount yield or rate represents how far below par rather than the return on par. For instance, in the above example the investor receives 5.34% discount yield for 13 weeks by paying $98.650167 at inception to receive $100 after 13 weeks. The equivalent money market return could be calculated as 100 / 98.650167 x 360/91 = 5.4131%. Note that for positive interest rates, the money market rate will be higher than the discount rate.
Non-competitive bids and competitive bids
Non-institutional investors are able to submit non-competitive tenders to T-Bill auctions. These investors are agreeing to participate in the auction based on the prices set by other participants. The sizes of individual non-competitive tenders are limited. When the auction process begins, the Treasury accepts all non-competitive bids first, and then proceeds to accept competitive bids, which increase in rate, until the full amount of the offering has been awarded. All successful bids are awarded the same rate.
Holidays and postponements
There are cases in which the 13-Week U.S. Treasury Bill auction date is changed, usually due to public holidays. For example, the 13-Week U.S. Treasury Bill that settled on Thursday, September 7, 2023, was auctioned on Tuesday, September 5, because Monday, September 4 was Labor Day, a federal holiday. A Tentative Auction Schedule published by the U.S. Department of the Treasury shows the Announcement date, Auction date, and Settlement Date of all Treasury securities.
CME Group 13-Week U.S. Treasury Bill futures
On October 2, 2023, pending all relevant Commodity Futures Trading Commission (“CFTC”) regulatory review periods, CME Group will list 13-Week U.S. Treasury Bill futures. The final settlement price of an expiring contract will be based upon the 13-Week Treasury Bill auction discount yield, published by the Treasury. Initial listing will include six expiries, consisting of four IMM quarterly contracts (March, June, September, and December schedule) and two serial contracts. Each contract will expire on the Monday preceding the third Wednesday of the contract month. Initially listed contracts will include the October 2023, November 2023, December 2023, March 2024, June 2024, and September 2024 contracts.
The specifications of the 13-Week U.S. Treasury Bill futures will be familiar to Short-Term Interest Rate (STIR) traders, since the contract’s characteristics closely mirror other STIR contracts. They will be cash settled to the familiar IMM index, or 100 less the highest accepted discount yield at the 13-Week T-Bill auction occurring in the same week as the contract expiry. The contract size is defined by the IMM index at $2,500 per percentage point, or more commonly represented as $25 per basis point.
Contract critical dates
The “contract month” convention for naming monthly 13-Week U.S. Treasury Bill futures was designed to align with that of Three-Month SOFR futures. Consider the following two contracts:
- One is a December 2023 Treasury Bill (TBF3Z3) futures contract that comes to final settlement on the Monday preceding the third Wednesday of December 2023. The final settlement price is based on the 13-Week Treasury Bill auction discount yield on the Monday preceding the third Wednesday of the delivery month. This is a forward-looking rate that covers roughly three months of rate exposure.
- The other is a December 2023 Three-Month SOFR (SR3Z3) futures contract that comes to final settlement on the third Tuesday of March 2024. The interval of interest rate exposure that informs the contract final settlement price – the contract’s Reference Period – starts on the third Wednesday of December 2023 and ends on the third Tuesday of March 2024. This aligns roughly with the three months of exposure covered with the 13-Week U.S. Treasury Bill futures.
Both are referred to as “December” contracts, and the interval of interest rate exposure is essentially the same.
Exhibit one—contract critical dates
Last trading day
The last trading day is usually on Monday in the same week as the contract’s expiry. Trading in an expiring contract shall terminate at 2:00 p.m. Central Time. In the event that Monday is a holiday, the last trading day will move to Tuesday.
Example: If the 13-Week T-Bill is auctioned on a Monday, trading will terminate that same Monday at 2:00 p.m. If Monday is a holiday, and the 13-week U.S. T-Bill is auctioned on Tuesday, then trading will terminate that same Tuesday at 2:00 p.m.
Final settlement price
The final settlement price is 100 contract price points minus the high discount yield of the 13-Week U.S. Treasury Bill competitive auction.
Example: The hypothetical TBF3Q3 contract would settle to the 13-Week U.S. Treasury Bill auctioned on a Monday, August 14, 2023, which had a high rate of 5.295%.
Final settlement price = 100 – 5.295 = 94.705
Price = 100 minus rate
Not only at final settlement but at all times, the Treasury Bill contract price takes the familiar IMM Index form, derived by subtracting the value (expected or actual) of the contract’s 13-Week U.S. Treasury Bill rates from 100.
Example: A rate of 5.295% per annum would be subtracted from 100 to determine a contract final settlement price of 94.705.
One basis point = $25
Gains or losses on a contract position are calculated simply by determining the number of interest rate basis points (“bps”) by which the contract price has moved, then multiplying by the value of one bp per contract. As with Three-Month SOFR futures, each basis point of contract interest is worth $25. Thus, 13-Week U.S. Treasury Bill futures contract size is $2,500 x the contract IMM Index.
Minimum price increment = Either ¼ bp or ½ bp
The price of a 13-Week U.S. Treasury Bill futures contract trades in increments of ¼ bp or ½ bp, depending on the proximity of the contract final settlement date. Generally, the minimum price fluctuation is ½ (equal to $12.50 per contract). The contract’s minimum price fluctuation is reduced to ¼ bp (equal to $6.25 per contract) when the contract has one month or less until its last day of trading.
T-Bill futures listings are comprised of the nearest four March Quarterly contracts (March, June, September, December) and the nearest two Serial months contracts (January, February, April, May, July, August, October, November).
If the U.S. Department of Treasury’s 13-Week U.S. Treasury Bill auction is delayed past the contract’s last trade date/time or canceled, then the final settlement price shall be sourced from the Daily Treasury Bill Rates published by the U.S. Department of the Treasury, which represents the daily secondary market quotations on the most recently auctioned 13-Week U.S. Treasury Bill, on the day of the initially proposed auction.
If the Daily Treasury Bill Rates published by the U.S. Department of the Treasury is unavailable, then the final settlement price shall be determined by the CME 3-Month Term SOFR Benchmark Rate on the day of the originally scheduled auction, converted into a discount rate.
Exhibit two– Contract specifications for CME 13-Week U.S. Treasury Bill futures
Complementarity with SOFR indices
One might expect the market rate of 13-Week T-Bills to be well correlated with the expected forward rate for three-month SOFR. CME Term SOFR Reference Rates provide a reliable, indicative measurement of forward SOFR rates, and as such can be used for comparison with historical 13-Week T-Bill rates. Exhibit three demonstrates the correlation.
Exhibit three — CME Term SOFR vs Three-Month Treasury Bill yield
Exhibit four — Volatility analysis (CME Term SOFR vs Three-Month Treasury Bill yield)
With the introduction of 13-Week U.S. Treasury Bill futures, specific interest rate risks can now be more effectively managed through short term U.S. Treasury securities. With the capability to spread against other short term interest rate products coupled with the highly liquid markets at CME, 13-Week U.S. Treasury Bill futures strengthen the already dynamic short term interest rate futures complex.
CME Globex: TBF3
- 100 less 5.34% x 91 days / 360 day count basis