Table of contents
- Important note
- What are interest rate futures?
- Treasury futures: ZT, ZF, ZN and ZB
- SOFR futures: SR3 and SR1
- Fed Funds futures: ZQ
- SOFR vs Fed Funds
- Rates up, futures down
- What drives interest rate futures?
- Yield curve and spread trading
- Margin, DV01 and risk
- Micro Treasury and Yield futures
- Delivery, cash settlement and rollover
- Strategies for interest rate futures
- Common mistakes
- Broker and tools
- Glossary
- Sources
- Conclusion
- FAQ
Quick summaryWhat you should know about interest rate futures
- Treasury futures track the price and yield of US government bonds. When the yield falls, the Treasury futures price normally rises.
- SOFR and Fed Funds futures are priced as 100 minus the expected rate. A higher expected rate means a lower futures price.
- ZN is 10-year Treasury Note futures. The contract has a face value of $100,000 and a tick value of $15.625.
- SR3 and ZQ are used for short-term rates and Fed expectations. Margin is only a collateral requirement; real risk is driven by DV01, duration and the number of contracts.
Important note
Best Futures is not an investment adviser, brokerage or tax adviser. This article is general information about interest rate futures and futures trading. It is not a recommendation to buy or sell a specific contract.
Interest rate futures can seem calmer than Bitcoin, oil or natural gas, but that doesn't mean the risk is low. Inflation data, employment data, Fed decisions and Treasury auctions can produce large moves in a short time.
Before you trade interest rate futures, you should know which part of the yield curve the contract tracks, what one tick is worth, whether the contract is physically deliverable or cash-settled, how much a basis point means for your position, and when the contract needs to be closed or rolled.
What are interest rate futures?
Interest rate futures are standardised futures contracts linked to interest rates, bonds or money market rates. They are used by banks, asset managers, pension funds, corporations and macro traders to manage interest rate risk, hedge bond portfolios and express views on central bank policy.
For active traders, interest rate futures offer a direct way to trade changes in US interest rates: from short-term money market rates to 30-year government bonds. That makes the market useful for directional trading, hedging, relative value and yield curve trading alike.
| Use case | Example | Typical contract |
|---|---|---|
| Hedging | A fund reduces interest rate risk in a bond portfolio | ZT, ZF, ZN, ZB |
| Macro trading | A trader positions for lower US interest rates | ZN, ZB, SR3 |
| Fed expectations | The market prices in rate cuts or a pause | ZQ, SR3, SR1 |
| Yield curve | A trader trades the difference between 2- and 10-year rates | ZT vs ZN |
The key thing to understand is that the contracts are not identical. A Treasury future gives exposure to bond price and duration. A SOFR future gives exposure to the expected realised short-term rate over a period. A Fed Funds future tracks the expected average effective Fed Funds rate for a specific month.
What Treasury futures exist, and what separates ZT, ZF, ZN and ZB?
Treasury futures track different parts of the US yield curve. The most widely used contracts for active traders are 2-Year, 5-Year, 10-Year and 30-Year Treasury futures.
| Contract | Ticker | Part of the curve | Contract size | Minimum tick | Tick value |
|---|---|---|---|---|---|
| 2-Year T-Note | ZT | Short end | $200,000 | 1/8 of 1/32 | $7.8125 |
| 5-Year T-Note | ZF | Short/medium | $100,000 | 1/4 of 1/32 | $7.8125 |
| 10-Year T-Note | ZN | Medium | $100,000 | 1/2 of 1/32 | $15.625 |
| 30-Year T-Bond | ZB | Long end | $100,000 | 1/32 | $31.25 |
Treasury futures are quoted in points and fractions of a point, with par as the basis of 100. CME states that ZN, 10-Year U.S. Treasury Note futures, has a face value of $100,000 at maturity and product code ZN on Globex.
ZN is not a pure Fed trade
An expected Fed rate cut can be positive for ZN, but the 10-year yield is also influenced by inflation, growth, borrowing needs, auctions and the term premium. It's therefore too simple to say a Fed cut automatically means ZN has to rise.
SOFR futures: SR3 and SR1
SOFR stands for Secured Overnight Financing Rate and is a key reference rate for secured overnight US lending. Since the transition away from LIBOR, SOFR futures have taken over much of the role Eurodollar futures previously played in the short-term US rates market.
Three-Month SOFR futures: SR3
SR3 is Three-Month SOFR futures. CME describes the contract as $2,500 multiplied by the contract's IMM index, where the price quotation is 100 minus R. R is the annualised, compounded SOFR rate for the contract's reference quarter.
| Expected SOFR | Approximate SR3 price | Interpretation |
|---|---|---|
| 5.00% | 95.000 | Higher rate, lower futures price |
| 4.50% | 95.500 | The rate is priced lower |
| 4.00% | 96.000 | Lower rate, higher futures price |
| 3.50% | 96.500 | More aggressive cuts expected |
SR3 is used by professional participants to trade short-term rates, the forward curve and monetary policy expectations. The contract is cash-settled and requires you to understand exactly which three-month period you're trading.
One-Month SOFR futures: SR1
SR1 is a one-month SOFR contract. It can be used when you want more precise exposure to a specific month than SR3 normally gives. For many retail traders, SR3 is better known, but SR1 can be relevant around specific meeting dates and short-term rate periods.
Fed Funds futures: ZQ
ZQ is the ticker for 30-Day Federal Funds futures. The contract gives the market a mechanism for pricing the expected average Effective Federal Funds Rate for a specific calendar month.
This is why Fed Funds futures are often used when the market interprets the probability of rate changes from the Federal Reserve. CME FedWatch builds its meeting-by-meeting probabilities on the prices in 30-Day Fed Funds futures.
| Expected average Fed Funds rate | Approximate ZQ price |
|---|---|
| 4.50% | 95.500 |
| 4.00% | 96.000 |
| 3.50% | 96.500 |
The same logic applies here: 100 minus the expected rate. If the market prices in a lower rate than before, the ZQ price rises. If the market prices in a higher rate, it falls.
What's the difference between SOFR futures and Fed Funds futures?
SOFR and Fed Funds futures can move in the same direction when rate expectations shift, but they don't track the same reference rate. SOFR is based on secured repo transactions, while Fed Funds futures track the effective Fed Funds rate.
| Contract | What it tracks | Time horizon | Typical use |
|---|---|---|---|
| SR3 | Compounded SOFR over three months | Three-month period | Forward curve and the short-rate market |
| SR1 | Average SOFR over one month | Monthly | Precise short-term rate exposure |
| ZQ | Average Effective Fed Funds Rate | Monthly | Fed rate expectations and FOMC |
Why do interest rate futures fall when rates rise?
The most important rule in bond futures is simple: yields up normally means Treasury futures prices down, while yields down means Treasury futures prices up.
Two different pricing logics
Treasury futures: The price moves like bond prices and is affected by duration.
SOFR and Fed Funds futures: The price is directly linked to 100 minus the expected rate.
In practice, the logic often points the same way: the futures price rises when the market expects lower rates than before. The difference is what the contract actually represents.
What drives interest rate futures?
Interest rate futures react to macro data, central bank communication and changes in market expectations. Different parts of the yield curve can nonetheless react differently to the same news.
| Driver | ZT / ZF | ZN / ZB | SR3 / ZQ |
|---|---|---|---|
| FOMC rate meeting | High | High | Very high |
| Inflation data | High | Very high | High |
| Employment data | High | High | High |
| Treasury auctions | Lower | High | Low |
| Inflation expectations | Moderate | Very high | Moderate |
| Term premium | Lower | Very high | Low |
| Liquidity stress | High | High | High |
For SR3 and ZQ, it's especially important to know what the market is already pricing in ahead of a Fed decision. It's often the gap between expectations and communication that produces the biggest move.
Yield curve: steepener, flattener and 2s10s
The yield curve shows the rate across different maturities, from short-term rates to long-dated government bonds. One of the most closely followed ratios is the difference between the US 10-year and 2-year yield, often called 2s10s.
| Term | What it means |
|---|---|
| Steepener | The gap between long and short rates widens |
| Flattener | The gap between long and short rates narrows |
| Bull steepener | Short rates fall faster than long rates |
| Bear steepener | Long rates rise faster than short rates |
| Bull flattener | Long rates fall faster than short rates |
| Bear flattener | Short rates rise faster than long rates |
Curve trading is more advanced than plain directional trading. It's not enough to buy one ZT and sell one ZN. The contracts have different duration and DV01, so positions should normally be adjusted for interest rate risk.
How much margin is required for interest rate futures?
Margin changes continuously with volatility, market conditions, contract and broker. That makes a fixed leverage ratio a poor risk measure. In interest rate futures, it's often better to start with DV01.
DV01 means Dollar Value of 1 Basis Point and shows roughly how much a position changes by when the rate moves one basis point, i.e. 0.01 percentage points. Longer bonds normally have higher duration and greater sensitivity than shorter bonds.
The question isn't just margin
Instead of asking how little capital is required to open the position, you should ask how much you lose if rates move 5, 10 or 20 basis points against you.
This is especially important in ZB and other long-dated rate contracts. A small move in yield can produce a large dollar change when duration is high.
What is Micro Treasury futures?
CME also offers smaller contracts aimed at individual traders, including Micro Treasury and Yield futures. These can be relevant alternatives for traders who want to learn the rates market with a more precise contract size than the standard contracts.
Yield futures differ from regular Treasury futures in that they trade directly on yield. That makes them pedagogically simpler for some traders, but you still need to understand contract size, tick value, liquidity and how the product fits your strategy.
Physical delivery, cash settlement and rollover
Treasury futures such as ZT, ZF, ZN and ZB are, in principle, deliverable contracts. That doesn't mean the retail trader usually wants delivery, but the contract has a delivery mechanism with a basket of qualified government bonds.
Which bond is most advantageous to deliver is often referred to as cheapest-to-deliver, or CTD. The delivery mechanics use conversion factors to handle differences between the delivery candidates.
| Contract type | Settlement | Practical consequence |
|---|---|---|
| Treasury futures | Delivery of a qualified government bond | Retail traders normally close or roll before delivery |
| SOFR futures | Cash-settled | No bond delivery |
| Fed Funds futures | Cash-settled | Settled against the reference rate |
| Yield futures | Cash-settled | More direct rate exposure |
Always follow your broker's internal deadlines. They can fall earlier than the exchange's last trading day or delivery deadlines.
Strategies for interest rate futures
Directional trading in ZN
A trader who expects lower 10-year yields can buy ZN. A trader who expects higher 10-year yields can sell ZN short. A typical setup can combine macro data, the dollar's reaction, a price break, VWAP and acceptance above or below a key level.
Fed expectations with ZQ or SR3
ZQ and SR3 are more precise tools for short-term rates and Fed expectations. If you believe the market is pricing in too few rate cuts, a long position can be relevant. If you believe the market is pricing in too much easing, a short position can be relevant. This requires knowing the contract month, the rate period and the FOMC meetings that fall within it.
Yield curve trading
A yield curve trade isn't necessarily about whether rates go up or down, but about the difference between maturities. If you expect the 2-year yield to fall more than the 10-year yield, that resembles a bull steepener scenario. Such positions should be built with DV01 adjustment.
Common mistakes when trading interest rate futures
- Thinking ZN is a direct trade on the next Fed rate meeting.
- Mixing up Treasury futures, SOFR futures and Fed Funds futures.
- Not understanding that SR3 and ZQ are priced as 100 minus the rate.
- Using margin as the only measure of risk.
- Ignoring DV01, duration and the difference between 2-year and 30-year interest rate risk.
- Building curve trades without DV01 adjustment.
- Holding deliverable contracts too long into expiry.
- Forgetting FX risk when the result is assessed in your home currency.
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Broker and tools for interest rate futures
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Which broker suits interest rate futures?
EdgeClear can be relevant for active futures traders who want access to CME Treasury, SOFR and Fed Funds contracts, futures-focused order execution and multiple platform choices.
TradingView is useful for following Treasury yields, ZT, ZF, ZN, ZB, the dollar, inflation expectations, stock indices, gold and other macro-sensitive markets.
Bookmap can be used by experienced intraday traders who follow liquidity and order flow around CPI, FOMC, Non-Farm Payrolls and the US market open.
Glossary
| Term | Explanation |
|---|---|
| Interest rate futures | Futures contracts linked to interest rates, bonds or money market rates. |
| Treasury futures | Futures on US government bonds and bills. |
| ZT | 2-Year Treasury Note futures. |
| ZF | 5-Year Treasury Note futures. |
| ZN | 10-Year Treasury Note futures. |
| ZB | 30-Year Treasury Bond futures. |
| SR3 | Three-Month SOFR futures. |
| SR1 | One-Month SOFR futures. |
| ZQ | 30-Day Federal Funds futures. |
| SOFR | Secured Overnight Financing Rate. |
| DV01 | The dollar change for a one-basis-point rate move. |
| Duration | Sensitivity of bond price to interest rate changes. |
| Steepener | A position that the gap between long and short rates widens. |
| Flattener | A position that the gap between long and short rates narrows. |
| CTD | Cheapest-to-deliver, the most advantageous bond to deliver. |
| Rollover | Switching from an expiring contract to the next contract month. |
Sources and further reading
- CME Group: 10-Year U.S. Treasury Note futures
- CME Group: 2-Year U.S. Treasury Note futures
- CME Group: 5-Year U.S. Treasury Note futures
- CME Group: 30-Year U.S. Treasury Bond futures
- CME Group: Three-Month SOFR futures
- CME Group: 30-Day Federal Funds futures
- CME Group: FedWatch Tool
Conclusion: interest rate futures are macro trading with precise tools
Interest rate futures are among the most effective instruments for trading macro, central bank policy and the bond market. Treasury futures such as ZT, ZF, ZN and ZB suit traders who want exposure to different parts of the US yield curve.
SOFR futures and Fed Funds futures are more direct tools for short-term rates, the money market and the market's expectations for the Federal Reserve. The key difference is simple: Treasury futures are about bond prices, duration and yield, while SOFR and Fed Funds futures are about expected short-term rates.
Choose the contract based on your market thesis
The most relevant contract isn't necessarily the one with the lowest margin. The right contract is the one that matches your market thesis, time horizon and maximum acceptable dollar risk.
Capital risk: Futures trading carries a high level of risk and is not suitable for everyone. Losses can exceed deposited capital. This article is general information, not investment advice.
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Frequently asked questions about interest rate futures
Short answers about Treasury futures, SOFR, Fed Funds, ZN, DV01 and risk.
Interest rate futures are futures contracts linked to interest rates, government bonds or money market rates. They are used for speculation, hedging, duration management and yield curve trading.
ZN is 10-Year U.S. Treasury Note futures on CME. The contract represents $100,000 in face value at maturity and is one of the most widely used contracts for exposure to the US 10-year yield.
SOFR futures are futures contracts linked to the Secured Overnight Financing Rate. SR3 is Three-Month SOFR futures and is priced as 100 minus an annualised, compounded SOFR rate for the contract's reference period.
Fed Funds futures, ticker ZQ, track the expected average Effective Federal Funds Rate for a specific calendar month. The prices are used in, among other things, CME FedWatch.
Bond prices and yields normally move in opposite directions. When yields fall, the value of existing bonds rises, so Treasury futures can rise as a result.
No. ZN follows 10-year Treasury prices, which are influenced by inflation, growth, government borrowing, auctions and the term premium. ZQ and SR3 are more direct tools for short-rate expectations.
DV01 means Dollar Value of 1 Basis Point. It shows roughly how many dollars a position changes by when the rate moves one basis point, i.e. 0.01 percentage points.
Interest rate futures are complex because they require an understanding of the yield curve, duration, pricing and contract specifications. A simulator and smaller Treasury Yield or Micro Treasury contracts can be a better starting point than standard contracts.