While “The Steepening” may sound like a Hollywood-produced thriller wherein an animated monster made of tea leaves terrorizes some unassuming small town, it’s in fact the increase in the spread between short-term and long-term interest rates.
This form of steepening, however, can be a beast in its own right: the gap between 2YR and 10YR US Treasury rates has gone from below 0.80% at the start of December to above 1.3% last week (its highest value since 2015).*
The Case for the 2YR
Most of the steepening seen in the yield curve has come from the fresh legs of the 10YR getting as far as 1.4% as the 2YR still sits near 0%. A case could be made for the 2YR finally waking up and taking part in some of the upside that the rest of the curve has witnessed in the last few months (Small 2YR Yield (S2Y) futures let traders directly access short-term rates).
The Heat is On (Small 2YR vs Small 10YR)
Source: dxFeed Index Services (https://indexit.dxfeed.com)
The Case for the Flattener
Traders can also play the difference between 2YRs and 10YRs by way of the spread. This interest rate-neutral trade puts two parts of the yield curve together to speculate on their difference growing and contracting. Some flattening could be in order after this historic run of steepening.
The TUT Spread
|+1 S2Y \ -1 S10Y||-1 S2Y \ +1 S10Y|
The everyday trader can choose to view this blockbuster event through the lens of bullish/bearish interest rate trades or steepening/flattening yield curve spreads.
Looking for a new way to trade stocks, commodities, and foreign exchange? Sign up for in-depth analysis on products that are small, standard, and simple from the Small Exchange: https://go.smallexchange.com/IBKRTC
*Treasury yields (https:/treasury.gov) and index values (https://indexit.dxfeed.com/) taken on 2/25/21
Disclosure: The Small Exchange
© 2021 Small Exchange, Inc. All rights reserved. Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information in this advertisement is current as of the date noted, is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Trading futures involves the risk of loss, including the possibility of loss greater than your initial investment.
Interactive Brokers Group, Inc., the parent company of Interactive Brokers, LLC, is a minority owner of Small Exchange Inc.
Disclosure: Interactive Brokers
Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.
This material is from The Small Exchange and is being posted with permission from The Small Exchange. The views expressed in this material are solely those of the author and/or The Small Exchange and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
Disclosure: Futures Trading
Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures, please read the CFTC Risk Disclosure. A copy and additional information are available at ibkr.com.