Risk premiums in the U.S. Treasury futures

We employ a no-arbitrage term structure model with latent state variables and a GARCH-type volatility factor to price U.S. Treasury futures and investigate their embedded risk premiums. The model-implied futures risk premiums exhibit cyclical variations, reflecting investors’ dynamic perception of interest rate risk. Notably, heightened risk premiums coincide with an upward-sloping yield curve, a state typically associated with monetary policy easing during economic downturns, and vice versa. Traders’ positions in Treasury futures are also significantly associated with risk premiums. We document a robust negative relationship between the futures risk premium and the net positions of commercial traders and asset managers, a finding consistent with the hedging pressure hypothesis. Specifically, our sample features a substantial increase in net long positions by these traders for off-balance-sheet duration exposure, coinciding with lower risk premiums.