Quick Takes: USD rates overview in 2024

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 are you doing? It looks like you’re in a different place than normal.

Ali Curi: Yes, I am in a different place, just keeping it fresh and moving around a little bit. It’s great to have you both here. Welcome back to Quick Takes.

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

Chris Barnes: All right, Ali, I’m going to keep this really simple.

What I want our listeners to take away is just two things today. The blog I’m going to talk about is dollar rates overview. I wrote it at the beginning of 2024. It relates to 2023 volumes, and from a volume perspective, our number one takeaway is that actually dollar rates are no longer the largest market.

When we look at the relative sizes of swap markets in 2023, there was more volume traded in Euro swaps than in dollar swaps. Now, we’ve obviously been monitoring volumes globally for a long time. We ran a very specific project with ISDA looking at the adoption of risk free rates. Mainly because we have a lot of data.

It does make it difficult from month on month to really monitor what is happening in specific markets. Part of the work that we did with ISDA, it was really important to monitor the overall volumes to see whether the transition away from LIBOR was going to have a negative impact on SWOT market volumes.

Generally speaking, that did not happen. We have just seen volumes continue to go up and up. However, when you look at the comparison of individual markets, now that dollar rates are really on a single rate, they’re really on SOFR with some basis traded versus fed funds. We’ve seen that the growth in Euro swaps has been greater because Euro swaps continue to trade 3/1 is Euribor, 3/6 is Euribor, Ester and Ester/Euribor basis. It’s really stating a truism, but the more indices you have, the more volumes. And so what that has meant for global swap markets is that volumes in swaps in euros are now larger than in dollars. So that’s a takeaway.

However, of course, swaps don’t trade in isolation.

They trade as part of the overall, let’s say, rates complex. And so a trader has a choice of what instrument they’ll trade. So for Euro swaps, they mainly have a choice between trading on futures at Eurex and swaps. If you look at dollar swap markets, the rates complex is a little bit more complicated. So you’ve got swaps, you’ve got cash treasury bonds, and you’ve got bond futures.

And for many years, it was really frustrating because you would be able to see volumes of one of those silos. But you could never really do a normalized comparison of volumes across all of those three. So whilst you might’ve seen that swap market volumes had increased, you might see that futures volumes have increased.

One might be measured by open interest. Another might be measured by contract counts or notionals, et cetera. There was never a standardized way. And way back in March 2020, the U. S. finally started disclosing weekly volumes of U. S. treasury bonds traded. As part of CCPView at Clarus, we’ve been consuming that data for four years now.

And what that allows us to do is directly compare volumes in cash, U. S. treasuries, in dollar swap markets, and in bond futures. And that’s a really interesting tool to have now, because we know now when we look at volumes, whether that is a true growth in the overall rates market for dollars, whether it’s a rebalancing of preferences of traders between futures swaps and cash, and it allows us to get this kind of different lens.

Whereby it might depend on market structure. It might depend on market participants. It might depend on red cap rules as to any point in time, what the preferences, whether it’s preferable to start trading bond futures, whether it’s preferable to move away from swaps. I’m not going to go through the data.

It’s difficult to talk percentages and changes. I’ll say broadly, everything’s grown. I’ll say generally, on futures have grown by more than anything else, but on futures have had a number of new futures contracts launched the so called CME Ultras, which really seemed to have gained a lot of momentum in the past four years.

And that does seem to fuel the growth. So again, you’re not necessarily comparing like for but the data for our people like us, it is really a fascinating set of data.
Amir, have you got any specific questions?

Amir Khwaja: Yes, Chris. So I guess I was really intrigued by this figure you came up with that there was six months in 2023, it had more than 30 trillion dollars notional.

It’s never happened before, right? And we’ve seen, CME, the impact on CME group volumes, they’re much higher on futures. The impact at the impact at LSEG with both LCH on swaps and TradeWeb on swaps. So do you feel 2024, it’s going to be a similar month and contribute to higher volume and I guess high revenues at CME, LCH and TradeWeb?

Chris Barnes: I can only imagine that 2023 is really going to be marked as like a high watermark of volumes. The first week that we ever had volumes for cash treasuries was middle of COVID, right? It was a crazy week. It was March of 2020. We had to wait until 2023 to see comparable volumes to March 2020. And then precisely, as you’ve said, whilst previously it felt like 20 trillion equivalent was our benchmark, 2023 we really saw this explosion in volumes. And yet, as I said, at the beginning of the podcast, Euro swap markets are larger than dollar swap markets because we’ve lost LIBOR. You would have thought the same would apply for SOFR futures and Eurodollars. I should highlight that this is all long dated volumes.

So I’m not looking at T bills. I’m not looking at money market futures. This is two years and longer. But of course, this is the first time that we’ve had central bank so reactive from a purely monetary policy perspective, as opposed to reacting to a crisis for 10 years. My personal expectation on 2024 is that volumes will be down compared to 2023.

Amir Khwaja: Yeah, so I guess, given where we are in the rate cycle, although I guess we have started the year with high issuance, possibly, I think in Feb, but then maybe the prior year, but I guess given the consensus that rates will start dropping at some point and 75 basis points in 2024, so we expect it to be, low volume, still high, but a little bit lower volume than 2023.

In these three markets, in cash treasuries, in ETDs, bond futures or in swaps.

Chris Barnes: Agreed. And that’s very much with a US focus, right? I just, I can’t get away from this podcast without stating, the US are the only jurisdiction that provide this level of transparency across derivatives, futures, and cash.

Be wonderful to see this in Europe. Be wonderful to see it in the UK. And it would be great to have it one day.

Ali, I think that was all we had time for.

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

Chris Barnes: Rather confusingly, I’ve called it Dollar Rates Overview in 2024, but that’s cause it was published in 2024. So it’s actually talking about 2023 data. I should make that very clear.

Ali Curi: Great, 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. Looking forward to it.

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, formerly Twitter, and on LinkedIn.

Thank you for joining us.