How can you trade the yield curve? | RJO Futures

February 8, 2017 3:01PM CST

I was asked about the NOB spread today, also known as the "Note Over Bond" spread. In a nutshell, this is a spread that is used by interest rate traders to trade the yield curve. If you think the yield will widen, buy 10yr Note (TY)/sell 30yr Bond (US), narrow sell (TY)/buy (US).

When the yield widens, this means the 30yr bond yield is rising faster than the 10yr note yield, thus the 30yr future is selling off quicker than the 10yr future.  Remember that the price is inverse to the yield.  Price goes down/yield goes up. 

In a rising rate environment, the proper trade would be to buy the NOB, buy 10yr (TY)/sell 30yr (US) because the yield should widen.  It is consensus that with the Fed is raising rates the 30yr yield should go up faster than the 10yr yield.  Or looking at it the inverse way, the 30yr future price should go down faster than the 10yr future price.  Thus, the appropriate trade would be to buy the 10yr future, and sell the 30yr future.  Both these contracts are exchange traded and extremely liquid. 

You can tinker with the ration, but the standard is 1.6/1, thus 1.6 10yrs to 1 30yr.  One can’t trade 1.6 of a contract on the exchange so you could trade 8 to 5, or even 3 to 2 if you wanted to ballpark it.  You could even do a 1/1 ratio for more bang for the buck.  It’s not going to protect you as much if you’re wrong, but you’ll make more money if you’re right.

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