Growing Liquidity in Gilt Futures

Financial markets have begun the year with a clear “risk off” tone, which has spurred demand for traditional safe haven assets like government bonds and gold. Falling oil prices, a focus on credit markets and diverging policies across global central banks have all contributed to increased volatility in early 2016. As a result, we have seen a decline in the yields for Government Bond assets and a rally in the gold price, which has had its best start in 30 years.

Against this backdrop, ICE’s portfolio of UK Gilt futures has seen increased market activity and growing open interest since the start of the year, as participants look for market opportunities across highly liquid interest rate instruments.

The ICE Gilt futures contract is a physically delivered futures contract based on the Gilt, which is a UK Government liability issued in Sterling by HM Treasury. ICE Gilt Futures cover 2 years to 30 years in maturity.

Compared with other European sovereigns, UK Gilts currently offer higher yields, as demonstrated in table 1.0 below.

Table 1.0 yield gilt spread
US 10 years Treasury 1.84 -0.27
UK 10 years Gilt 1.57 ~
Sweden 10 years Bond 0.81 0.76
Germany 10 years Bund 0.20 1.37
Switzerland 10 years Bond -0.45 2.02

Data as of closing date 02 March 16

ICE mini Gold vs. ICE Long Gilt
Future Prices

“With other European 10-year sovereign bonds yielding below 1% and with uncertainty regarding central bank monetary policy across the world, we have seen a record start to the year in terms of Gilt futures volume,” says Chris Rhodes, Head of Interest Rates at ICE.

Liquidity in ICE Gilt futures continues to expand

Long Gilt Future Yearly ADV and OI

Long Gilt average daily volume (ADV) and open interest (OI) have trended higher annually since 2010. ADV through February was approximately 244,000 contracts, which is up +15% versus the first two months of 2015, with OI of approximately 505,000 contracts, up +16% on the same basis. The chart to the right illustrates this trend.

ICE’s flagship Long Gilt futures contract is a key reference point for liquidity along the UK government yield curve. With Short, Medium, Long and Ultra Long Gilt futures, this suite of products allows traders and hedgers to form strategies and on the UK yield curve over 2, 5, 10 and 30 years. Options on the Long Gilt future allow for even greater flexibility in managing risk of UK government debt holdings.