Because the Dow Jones CBOT Treasury Index (DJCBTI) updates every 15 seconds, it is exquisitely sensitive to economic events. Whether it is a change in Fed policy or the release of key economic data, the DJCBTI reflects the swirls and eddies of changing market sentiment as events unfold. This feature of the Index allows portfolio managers, traders and analysts to use the Index to gauge market reaction to changing economic conditions and market expectations. 

Bond market trading is often likened to flying an airplane—hours of boredom interrupted by moments of terror. The market can veer from tranquility to turbulence in a matter of seconds as economic and political events unfold. Consider for instance the week beginning Monday, January 30, 2006 and ending Friday, February 3. It was a week that included an FOMC policy meeting, the Treasury’s February refunding announcement and the release of the monthly non-farm payroll data. As Figure 1 illustrates, the market posted sharp reactions to the Fed’s decision to hike the funds rate; to the release of ISM Index data and to the surge in job growth reported on Friday morning.

Portfolio managers, hedge funds and commodity trading advisors can go beyond using the Index just for simple market tracking. Investment managers can use the Index to efficiently gain core portfolio exposure to the Treasury market by replicating the Index in the futures markets either fully collateralized or on a levered basis.                                         

Replicating the Treasury Index
A simple way to replicate the Treasury Index is to buy its component parts in proportion to their Index weights. To find the correct proportions, add up the component weights and then divide each component weight by the sum of all the weights as shown in Table 1.  Once the percentage weights of the individual components are determined, the Index can be replicated by buying (or selling) the components exactly in the same proportions. For example, the respective weights of the Bond, 10-year and 5-year contracts as shown in the Table are 18.6%, 29.5% and 51.9%.  Therefore a 1,000 contract position of 186 bonds, 295 Ten-year notes and 519 Five-year notes would match the Index.

 

 

 

 

 

 

 

 

For risk management purposes, Index matching positions can be expressed in terms hypothetical Index contract equivalents. It requires multiplying the actual number of Index-weighted contracts held by the Index divisor.  The divisor in this case is 0.82288, so a combination of bond, 10-year and 5-year Treasury contracts whose par value summed to 1,000 would be the equivalent of 823 hypothetical Index contracts.  Fully collateralizing the position using Treasury bills as margin would create a synthetic total returns Treasury Index bond.

The Chicago Board of Trade licenses the Treasury Index through Dow Jones Indexes. Licenses can be obtained from Dow Jones Indexes at http://www.djindexes.com

This information provided by the Board of Trade of the City of Chicago, Inc. (CBOT) is intended solely for purposes of information and education only, and is not guaranteed by the CBOT as to accuracy, completeness, nor any trading result, and does not constitute trading advice or constitute a solicitation of the purchase or sale of any futures or options. The Rules and Regulations of the CBOT should be consulted as the authoritative source on all current contract specifications and regulations.

“Dow Jones” is a service mark of Dow Jones & Company, Inc. “ Dow Jones CBOT Treasury Index” is a service mark of Dow Jones and The Board of Trade of the City of Chicago, Inc.  The Dow Jones-CBOT Treasury Index is owned by the CBOT and calculated and distributed by Dow Jones Indexes.  Any structured products based on the Dow Jones CBOT Treasury Index ™ are not sponsored, endorsed, sold or promoted by Dow Jones, and Dow Jones makes no representation regarding the advisability of trading in such product(s).