Play a Yield Curve Steppener w/ Treasury Bond/Note Futures?

Discussion in 'Financial Futures' started by synchro, Sep 18, 2007.

  1. synchro


    For the knowledgeable traders out there, how would you put on a trade using 30-yr bond and 2-yr note treasury futures if your view is that the yield curve is going to steepen?

    What would be the proper ratio between the 2 (using ECBOT bond futures) so that I am delta neutral hedged if the curve moves in a parallel fashion?

    I would like the bet that the curve will continue to steepen, but indifferent to whether it is a bull steepener or a bear steepener

    thx for your help.
  2. Neat question............If you believe that the bond has an approximate average daily range of 3.5 times as many 1/32nd ticks as the note, then you'd want to be "long" 7 notes versus "short" 4 bonds. 7 times 62.50 times 1.00 equals 4 times 31.25 times 3.50. You'll want to be very careful with the "hedge ratio" because you can expect it to be most volatile compared to the other spreads; i.e. 2/5, 2/10, 5/10, 5/30 or 10/30.
  3. To calculate the appropriate ratio you need to approximate the DV01 of the ZB and the ZT bond futures. You can do this by:

    1. Find the CTD (cheapest to deliver) bond/note for both contracts.
    2. Calculate the DV01 of the two underlying CTD cash bonds.
    3. Divide both cash bond DV01s by their respective conversion factors to get the futures DV01.
    4. You now know the DV01 of both futures contracts based on a par value of $100. Since the ZB par value is $100,000 and the ZT is $200,000 you'll need to multiply the ZB DV01 by 1000 and the ZT DV01 by 2000.
    5. Now that you know what the DV01 of the contracts are based on their actual par values you can divide the ZT's DV01 by the ZB's DV01. This ratio tells you how many ZB contracts to short for every ZT contract that you long.

    Keep in mind that you may need to transact a lot of contracts to get close to the ratio that you calculate. There's a document on CBOT's site that may be helpful for you to look at:
  4. synchro


    Thanks for both replies. Very helpful.
  5. How could one do this with mutual funds or ETFs instead of the derivative market. Rydex has the Inverse bond fund for the long end of this trade. I would think the short end would just use a short bond fund. Seems straight forward?
  6. You are 3 months and 200 basis points late for this trade. But its a good strategy to know how to implement.
  7. I agree I am late to the game. But there may be more to go. I do think the long end will come over the course the next 2-3 years so I may just use the inverse long bond fund could be a nice play...
  8. This is exactly the right calculation. One shortcut if you're trading relatively small lots:

    Look for where the margin break CME will give you for trading these two instruments as a spread. In general, that's pretty close to the right ratio. For example, CME will give you a 65% margin credit if you buy bonds, sell 2-year notes in a 3:8 ratio. If you don't care about the margin break, you'll know 1:2 is pretty close.
  9. Anyone out there have any thoughts on the NOB spread? (Notes over Bonds).

    The spread went out at +20 ticks. The highest since 2004. I'm not that familiar with how this spread trades. I'm flat right now but I've legged into an ugly nob vs. synthetic option nob and I'm debating on leaving it on or trying leg out into a better position.

    Any experienced NOB traders care to give your $0.02?
  10. CPI Yield curve effect

    If CPI comes in hot tommorrow, and I don;t know how it couldn't, shouldn't the 30year get smacked worse then the 10yr.

    Makes sense to me but these bonds are all over the map lately.
    #10     Mar 12, 2008