In general, when yields are falling, the yield curve will steepen. The offers that appear in this table are from partnerships from which Investopedia receives compensation. A steepening yield curve indicates that investors expect stronger economic growth and higher inflation, leading to higher interest rates. TUT? Fixed Income Trading Strategy & Education. Posted by 6 months ago. The Trade War Has Sent the Yield Curve to Its Flattest Since 2007 By . 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. As an example, in a bull flattening trade, you're betting that rates will decline AND the yield curve will flatten. Steepening? When incorporating this strategy, there are some important considerations to keep in mind. yields on long-term bonds are rising faster than yields on short-term bonds. A bear flattener causes the yield curve to flatten as short-term rates start to ratchet higher in anticipation of the Federal Reserve (FED) embarking on a tightening monetary policy. The spread on both Treasuries is 200 basis points. Bear flatteners are typically structured using options. The curve steepener trade involves an investor buying short-term Treasuries and shorting longer-term Treasuries. For example, an individual could employ a curve steepener trade by using derivatives to buy five-year Treasuries and short 10-year Treasuries. “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. Phillips found an inverse relationship between the level of unemployment and the rate of … The risk measure for yield curve spread trades is DV01 (dollar value of a basis point). Specifically, under QE3, the Fed is actively buying treasuries with maturities of 2-10 years (to the tune of $85 billion of a month). For many active market participants, successful bond trading is not merely picking a point along the yield curve, and speculating whether interest rates will go up or down, but rather to speculate on the shape and slope of … With the announcement yesterday by the FOMC that they will continue with QE3, the question once again remains: how long will they continue with this intervention? An article by the New York Institute of Finance Yield Curve Analysis instructor Bill Addiss. With a history dating back more than 90 years, the New York Institute of Finance is a global leader in training for the financial services and related industries with course topics covering investment banking, securities, retirement income planning, insurance, mutual funds, financial planning, finance and accounting, and lending. One active trading strategy to take advantage of this scenario is to engage in what is referred to as a “flattening trade”. Traders and investors can, therefore, take advantage of the steepening curve by entering into a strategy known as the curve steepener trade. Under this strategy, the trader or portfolio manager would short sell the 10-year treasury and simultaneously buy long the 30-year bond. Sometimes, the yield curve may be inverted or negative, meaning that short-term Treasury yields are higher than long-term yields. A humped yield curve is a relatively rare type of yield curve that results when the interest rates on medium-term fixed income securities are higher than the rates of both long and short-term instruments. Liz McCormick. 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. Most importantly, the volatility (duration) of the 10-year note is not as volatile as the 30-year bond. Also, what is a flattener? Close. Tudor notes that curve flatteners provide 'tail risk insurance' against the trades of long gold, short the US dollar, and long equities. By doing so, you are now not speculating on changes in the absolute level of interest rates, but rather the yield differential between these two maturities. The guys use the new Small Treasury Yield (S10Y) futures as their anchor for trading both 2YR-10YR (TUT) and 10YR-30YR (NOB) spreads. 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