CME Group Inc. said Thursday that it would launch federal-funds futures contracts extending three years in a move expanding investor options for assessing longer-term Federal Reserve interest rate policy.
The world’s largest futures exchange by trading volume said it would add the third-year contracts to its existing slate, with a planned Feb. 27 launch of monthly fed-funds futures for February 2013 through January 2014.
The so-called “green” fed-funds contracts are being added as the Fed maintains a monetary policy that has kept the funds rate target inside a lowest-ever range of 0 percent to 0.25 percent since December 2008.
For many months, traders have pushed further out their estimate for when the central bank will begin raising the funds rate, which would be a sign of economic recovery and heightened inflation pressures.
Fed-funds futures traders recently priced in a 90 percent chance for the rate-setting Federal Open Market Committee to lift the funds rate to 0.5 percent at its meeting in late January 2012.
The futures market sees a 96 percent chance for a further tightening to 0.75 percent after the FOMC meeting in late April of next year.
Federal-funds futures typically produce the lowest volume of CME’s interest rate product line, which includes heavily-traded Treasury and Eurodollar futures. However, CME reports volume jumped 400 percent last year for second-year fed-funds futures contracts. In the same time frame, volume for second-year Eurodollar futures increased 40 percent, according to CME.
Eurodollar futures are quarterly contracts that measure expectations for changes in the three-month London Interbank Offered Rate, what banks charge each other to borrow U.S. dollars.
The three-month dollar Libor is also considered a proxy for U.S. funds rate expectations.
CME does not plan to list options on the third-year fed-funds futures contracts.
