Interest Rate Futures: Treasury and SOFR Contracts Explained

Before you read: Futures Contract Specifications: Size, Tick, Multiplier and Months

What you will learn

• How Treasury futures relate to government bonds and why their prices move opposite to yields.
• How SOFR futures are quoted as 100 minus a rate, giving an implied rate.
• Why rate futures are used for both hedging and expressing views on policy, and what their prices cannot say.

What are Treasury futures?

If bond yields rise, what happens to the price of an existing bond?

Treasury note/bond futures refer to specified deliverable Treasury securities; the named maturity is not a promise that a single bond of exactly that maturity is delivered. Bond prices and yields generally move inversely, but the futures response also depends on the deliverable basket, financing and delivery terms. It is not a fixed dollar gain for a given policy announcement.

Contract-scoped quote example: For CME 10-Year T-Note futures (ZN, outright), the checked CME education gives a $100,000 face-value unit and $1,000 per price point, with an outright minimum increment of half a 32nd = 1/64 point. Other Treasury products, and spread versus outright increments, can differ. These are specifications, not fictional multipliers; the following prices and fees are fictional.

Write a quote as 112−16½, meaning 112 whole points plus 16.5/32, not the decimal 112.165:

• 16.5/32=0.515625; decimal quote=112.515625 points.
• One 32nd=1/32=0.03125 point, worth 0.03125×$1000=$31.25/contract.
• One half-32nd tick=0.015625 point, with exact economic value $15.625/contract before applicable clearing/rounding conventions.
• Next example quote 112−17½=112.546875. Difference 0.03125 point is two outright ticks, or +$31.25 for one long contract, before costs. A short has the opposite sign.
• Two long contracts: 2×$31.25=$62.50 gross. With a fictional $4 combined entry/exit cost per contract, total costs 2×$4=$8, leaving $54.50 net. This is not a live broker fee quote or a personal trade recommendation.

Quote×$1000 is a quotation-based contract valuation, not a premium paid to open a futures trade, not a margin requirement and not a complete delivery invoice. A conversion factor standardizes eligible securities for coupon/maturity differences and enters the delivery invoice along with other terms such as accrued interest. Its 6% reference yield is a conversion convention, not a current yield or forecast. The short cannot deliver an arbitrary Treasury. “Cheapest to deliver” concerns the eligible security’s economics relative to delivery proceeds and financing/options, not simply the lowest visible cash price. We do not calculate an actual CTD choice or invoice here.

Check the current rulebook for exact deliverable eligibility, expiration, spread ticks and penny rounding. CME’s own education pages have described the ZN upper deliverable maturity differently (one older course page says up to 10 years; the conversion-factor material says less than 8 years), so this lesson does not state one. See Futures Contract Specifications: Size, Tick, Multiplier and Months and Futures Margin and Daily Mark-to-Market Explained for existing multiplier/tick and margin foundations.

How are SOFR futures quoted?

If a contract is priced at 96.00, what rate does that imply?

SOFR is an overnight Treasury-repo financing benchmark, not the FOMC target rate. A SOFR futures index price is 100 minus the annualized rate in percentage units for that contract’s specified reference period. Thus 96.00→4.00%, 96.50→3.50%, and 95.25→4.75%. Subtracting the decimal 0.04 from 100 to obtain 99.96 is the wrong unit conversion for a 4% quote.

For example CME’s September 2026 SR3 reference period begins September 16 and ends just before December 16, 2026; the contract name identifies the start month, not a September settlement of the full quarter’s unknown rates. An in-progress period combines realized fixings with pricing of remaining uncertainty. The final period rate is known only when the required fixings are available.

Reproducible toy day-count comparison, not a full SR1 month or SR3 quarter: Suppose three business-day fixings are 4%, 5%, 6%, applying for 1, 1, 3 calendar days respectively. D=5 days. Use rates as decimals 0.04/0.05/0.06 inside interest factors.

• Arithmetic annual rate=(4×1+5×1+6×3)/5=5.4%.
• Compound growth factor=(1+0.04×1/360)×(1+0.05×1/360)×(1+0.06×3/360).
• Annualized compound rate=(factor−1)×(360/5)×100=5.401011167%.

The three-day fixing accrues simple interest over its covered calendar days within one factor; it is not automatically three independent daily observations. The product compounds between fixings. Actual contracts require every applicable fixing across the full month/reference period and product-specific final rounding. Do not submit this five-day toy rate as a real contract settlement.

Price-point versus rate-basis-point check: Under SR3’s checked $25 per basis point (equivalently $2,500 per index point), a fictional long from 96.00 to 96.01 gains 0.01×$2,500=$25 before costs. The quoted implied rate falls 4.00%→3.99%, one rate basis point. SR1 has a different monetary contract scale; do not copy the SR3 multiplier or maturity-dependent tick rules to it.

A strip reflects priced period-rate exposure, with risk premia/basis and already-realized observations where applicable. It is not a sequence of guaranteed FOMC target decisions or a literal policy probability distribution.

Rate futures diagram

Fictional index prices translate to annualized rates for defined product reference periods, not guaranteed policy targets. Treasury conversion is specifically ZN outright economics; actual delivery and rounding terms are separate.

Who uses rate futures?

Why would a bank or a pension fund care about future interest rates?

Banks, asset managers and companies use rate futures to hedge the effect of rate changes on loans, bond holdings and borrowing costs. Others use them to express views on central bank policy. Because the contracts are large and the price moves per basis point are small, they often trade with substantial leverage.

What this does not tell you about rate futures

• Where rates or bond prices will go. Implied rates change every day.
• Real contract terms such as tick sizes, quoting conventions and delivery rules. Check the exchange’s specifications.
• Whether the implied path matches a central bank’s plans.
• Nothing here suggests buying, selling or holding any rate contract.

Check yourself

1. Convert 112−16½, and calculate two-contract gross P&L to 112−17½ under the stated ZN factor.
2. Why is SR1’s monthly arithmetic rate not automatically SR3’s rate?
3. Does 96.00 mean a guaranteed 4% FOMC target at a future meeting? Hint: 100 minus price.
4. For unchanged fixed Treasury cash flows, why do higher required yields correspond to lower bond prices, and what general implication does that have for the lesson's price-quoted Treasury futures? Hint: bond prices and yields.
5. Why does a physically delivered Treasury-futures contract use conversion factors for an eligible basket, and do they make every deliverable identical? Hint: more than one bond can be delivered.

Last reviewed November 8, 2026. Spotted a mistake? Report an error.