The futures exchanges themselves recognize the more conservative nature of this strategy relative to an outright purchase or sale of contracts. What's it all mean?! A steepening yield curve indicates that investors expect stronger economic growth and higher inflation, leading to higher interest rates. yields on long-term bonds are rising faster than yields on short-term bonds. Bond Trading Strategy: The Flattening Trade. Some take a more subtle approach by trading spreads between, for example, CBOT Treasury futures to capitalize on changes in the shape of the yield curve. Tudor notes that curve flatteners provide 'tail risk insurance' against the trades of long gold, short the US dollar, and long equities. For the best experience on our site, be sure to turn on Javascript in your browser. What is a flattener trade? Also, what is a flattener? The curve may continue to flatten or invert, with or without a trade deal. Specifically, a flattener. New York, NY 10038. Bull Steepener: A change in the yield curve caused by short-term rates falling faster than long-term rates, resulting in a higher spread between the two rates. A curve steepener trade is a strategy that uses derivatives to benefit from escalating yield differences that occur as a result of increases in the yield curve between two Treasury bonds of different maturities. Hedge funds jump in to cash in on the arbitrage opportunity,suffer … Let's say that on Jan. … https://www.investopedia.com/terms/c/curve-steepener-trade.asp Flattening? Click here to download the course curriculum >. Phillips found an inverse relationship between the level of unemployment and the rate of … One macroeconomic scenario in which using a curve steepener trade could be beneficial would be if the Fed decides to significantly lower the interest rate, which could weaken the U.S. dollar and cause foreign central banks to stop buying the longer-term Treasury. A yield curve is a graph of the bond yield of various maturities. One active trading strategy to take advantage of this scenario is to engage in what is referred to as a “flattening trade”. As Matt goes on to point out, having a hedge against a “stress-loss” that involves the indices could well mean having a curve trade. The guys use the new Small Treasury Yield (S10Y) futures as their anchor for trading both 2YR-10YR (TUT) and 10YR-30YR (NOB) spreads. For example, an individual could employ a curve steepener trade by using derivatives to buy five-year Treasuries and short 10-year Treasuries. NOB? But that bet on the so-called flattening of the yield curve may be in the nascent stages of reversal. The flattening aspect can be easily expressed by buying a long-term bond, while simultaneously shorting a shorter-term bond. A strategy that is employed by many such participants is “the flattening trade”. When the yield curve is steep, banks are able to borrow money at a lower interest rate and lend at a higher interest rate. All Rights Reserved. In general, when yields are falling, the yield curve will steepen. This serves to lower those rates, given the increase in prices. A bear steepener is the widening of the yield curve caused by long-term rates increasing at a faster rate than short-term rates. “The only trade to have on in the marketplace is the yield-curve flattener,” said Tom di Galoma, managing director of government trading and strategy at Seaport Global Holdings. Steepening? The first task in designing a yield curve trade is to decide how you expect the Treasury yield curve to react to interest rate developments during the term of the trade. The yield curve risk is the risk of experiencing an adverse shift in market interest rates associated with investing in a fixed income instrument. Video/Image. The current trajectory of the flattening in the US Treasury 5s30s curve (30y yield minus 5y yield) and the 10s30s curve (30y yield minus 10y yield) illustrates a potential for the following: 1) A flat curve by July 2018 if the flattening trajectory continues (green lines); 2)A flat curve by Nov 2018 if we plot the trajectory from the recent steepening of the curve (red lines). Additionally, whereas I used the cash treasury market to illustrate this potential opportunity, it can be utilized in other markets as well, specifically the futures market. June 25, 2018, 12:37 PM EDT ... puts their forecast for the 2- to 10-year curve flattening … If it does the FOMC will be forced to ease monetary policy in order to support the U.S. economy. The curve steepener trade involves an investor buying short-term Treasuries and shorting longer-term Treasuries. The yield curve is a graph showing the bond yields of various maturities ranging from 3-month T-bills to 30-year T-bonds. 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