The Exciting World of Trading Treasury Bonds (Seriously)

For some, the thought of trading Treasury bonds still evokes visions of retirees in bygone days waiting patiently by their mailboxes for their biannual coupon payments. But in reality, today’s bond market remains the biggest securities market in the world, dwarfing the S&P 500 in size—if not excitement. 

Add a changing interest rate environment to the mix, and Treasury bond futures can become an interesting market to watch. 

First, here are a few things to learn about Treasuries.

Treasury bills vs. bonds vs. bills

First things first. When discussing Treasury securities, many traders use the term bonds as a general descriptor. Technically, Treasury bonds are long-term investments with maturities of 10 years or more. Maturities between two and 10 years are called notes, and maturities of one year or less are bills.

A bond represents debt, unlike a stock, which represents ownership. When you buy a bond, whether it’s from the U.S. Treasury, a corporation, a state, or a municipality, that entity is borrowing money from you and promises to pay you a fixed rate of return plus your money back at some future maturity date. The likelihood that entity will pay you the money is reflected in the bond issuer’s credit rating. Remember when the United States lost its AAA rating back in 2011? That happened because people thought the United States was a little less likely to pay its promised bond payments. A rating naturally affects a bond’s price and volatility.

Because the rate of return is fixed when the bond is issued, bond prices and interest rates typically move inversely to each other. Interest rates go up, bond prices go down, and vice versa. If a bond pays some coupon rate, say 5%, and interest rates drop to 4%, that 5% bond becomes more attractive and people will pay more for it. Remember this inverse relationship between interest rates and bond prices. It’s important because expectations of interest rate changes can have a big impact on bond prices. And small, incremental changes in bond prices can have a large impact on the bond’s yield. Yield is the bond’s coupon rate divided by the bond’s price.

Act your age: Maturity, volatility, and bond prices

Bonds also have different times to maturity, ranging from certificates of deposit (CDs) and T-bills maturing in a few months to 30-year Treasury bonds. A bond’s maturity not only affects the rate it offers, but also its price volatility. In simple terms, a bond with a shorter amount of time to maturity—like a 90-day T-bill—will typically have a lower coupon rate than a 30-year bond because people generally require less return to take a risk over a shorter amount of time.

A somewhat more complex concept is the relationship between a bond’s time to maturity and its price volatility. Without getting into all the joys of bond math with modified duration and convexity, suffice it to say, the price of a bond with more time to maturity will be more sensitive to changes in interest rates than a bond with less time. You can see that reflected in the implied volatility (IV) of options on futures for bonds of different maturities. For example, in early 2019, overall IV in options on 30-year Treasury bond futures was 6.4%, and the overall IV in options on 10-year Treasury note futures was 3.5%. They both have the same credit rating of the U.S. government, but the longer time to maturity of the 30-year bond means larger potential price changes, which can translate into higher IV in options on bond futures. When IV is higher, options premiums become more expensive.

Types of bonds

With a basic understanding of how bond prices work, you now have to sift through the range of bond and debt products. Most traders and investors generally consider three types:

1. Government and agency bonds include U.S. Treasuries and mortgage-backed securities that have high credit ratings and are actively traded. 
2. Municipal bonds are issued by entities like cities and states that use taxes and other revenue to pay back the bonds. Munis are popular with some investors because of certain tax advantages, but specific muni bonds may not be actively traded, and the interest income and capital gains on some may be subject to the alternative minimum tax.
3. Corporate bonds use a company’s revenues to pay the bonds and offer a much wider range of credit ratings and yields—from relatively safe names to high-yield “junk” bonds. Although bond traders might not trade corporate bonds themselves, they’ll sometimes look at the difference in the yields between corporate bonds and Treasuries to see if one may be overbought or oversold relative to the other.

All these instruments promise to pay interest and return of your principal at maturity, but they can have different ratings, yields, and maturities. Some are more actively traded than others and offer more flexibility. Foreign bonds aren’t easily traded in the United States by retail investors, and they involve currency and political risks that are beyond the scope of this article.

As for trading Treasury bonds…

If you ask an experienced trader how Treasury bonds are doing today, they’ll likely point you to 30-year Treasury bond futures or 10-year Treasury note futures. Though trading futures and options can be risky and not suitable for everyone, these particular contracts and their options are among the most actively traded bond products for retail investors and traders alike with more than $26 trillion in daily volume, according to the SEC. Munis and CDs are nice, but when traders trade “bonds,” they’re mostly trading bond and note futures and futures options. If you want to trade bond futures, you’ll need a futures account. Certain qualifications and permissions are required to trade futures or options on futures (see figure 2 at the end of this article). But any TD Ameritrade client can see futures quotes on the thinkorswim platform. For example, type the root symbol /ZB (for 30-year bond futures) or /ZN (for 10-year note futures) into the symbol field to see quotes, charts, and options (see figure 1).

Pulling quotes on thinkorswim

When you pull up /ZB on the Trade tab on thinkorswim, you’ll see quotes for all the bond futures expiration dates, which are always in March, June, September, and/or December. The futures contract that’s most actively traded, which is usually the one with the most volume and shortest amount of time left to expiration, is conveniently marked Active.

When you pull up /ZB on the Trade tab, you’ll also see plenty of Treasury bond futures options. The options have different expirations. The options will expire into, and are priced off, the futures contract with the corresponding expiration. For example, April, May, and June Treasury bond futures options expire into the June Treasury bond futures. September options expire into the September Treasury bond futures. The expirations on options are a little funky. Their final trading day is the last Friday that precedes by at least two business days from the last business day of the month before the stated expiration month of the options. So, June options stop trading on the third Friday of May. Options on bond futures are also American style, meaning they can be exercised any time before and including expiration and are physically settled. That means you buy or sell one bond futures contract for each option that’s exercised or assigned.

One primary difference between bond futures, options on futures, and equity options is point value. You’ll see bond futures quoted in 1/32nd increments and options in 1/64th increments. If /ZB has a price of 145.20, that means the price of the futures is 145 and 20/32nds. An option on /ZB might be “58 bid and “60 ask. That’s 58/64ths bid and 60/64ths ask. You multiply each by $1,000 to get the full point value, as a one-point change in bond futures or options is worth $1,000. To clarify further, if you sold a 147 call and bought a 148 call to create a vertical spread in /ZB for a net credit of “22, that credit is 22/64ths, and would generate $343.75 cash in your account. The max potential loss on the trade is the difference between the strikes of one point, which is worth $1,000, minus the credit. For example, $1,000 – $343.75 = $656.25. That’s also 42/64ths times $1,000. So, selling a one-point vertical in bond futures with a max profit of 22/64ths has a max potential loss of 42/64ths (before any trade costs).

Bond margin requirements

As of December 2023, Fed Regulation T requires an initial margin requirement of 50% of the security’s value. But that is only the minimum. Some equity brokerage firms may set the initial margin requirement higher, depending on circumstances. The margin requirement for bond futures is set by the exchange and is subject to change at any time. Note that although the exchanges set the minimum margin requirements for futures, your broker may hold a higher margin requirement if it deems necessary. Margin requirements for bond options use a method called SPAN (standard portfolio analysis of risk), which determines the potential loss of the position based on different scenarios in the bond futures price, time, and volatility. 

Margin trading increases your level of market risk. Your downside is not limited to the collateral value in your margin account. Schwab may liquidate, without contacting you, to meet a margin call. Schwab may increase its “house” maintenance margin requirements at any time and is not required to provide you with advance written notice. You are not entitled to an extension of time on a margin call.

Interested in applying for a futures account? See figure 2 below.

Bond futures options strategies 

Similar to equity options strategies where there are additional risks and complexities, investors should be aware that some equity options strategies can be applied to bond futures options strategies, but they bring with them their own challenges and risks. You may be long-term bullish or bearish on bonds if you expect interest rates to decrease or increase over time based on U.S. economic activity, but the 30-year futures typically make enough large price changes up and down daily and weekly to accommodate scalpers and swing traders looking to capture shorter-term moves. But, of course, past performance is not a guarantee of future results. Option traders often use defined-risk strategies like verticals and iron condors to speculate on bonds going up, down, or sideways. Although they’re actively traded with tight bid/ask spreads, bonds can move sharply in a matter of minutes.

Consider keeping your position size small while you’re learning to trade bond futures options. Even small position sizes can result in extreme losses. Before you take up bond trading, be sure you have a good handle on your risk appetite and understand the risks of your strategy. 

Whether you’re ready to start trading in the bond arena, or just want to start out as a spectator, get familiar with the bond trading tools on the TD Ameritrade website and the thinkorswim platform. There you can experiment with different strategies, such as applying an active swing trading approach for medium-term positioning, without risking any real money. 

Futures and futures options trading involves substantial risk and is not suitable for all investors. Please read the Risk Disclosure Statement for Futures and Options prior to trading futures products. Futures accounts are not protected by the Securities Investor Protection Corporation (SIPC).

Additional CFTC and NFA futures and forex public disclosures for Charles Schwab Futures and Forex LLC can be found here

Futures and futures options trading services provided by Charles Schwab Futures and Forex LLC. Trading privileges subject to review and approval. Not all clients will qualify.

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