Tom, Tony and Pete look at the far end of the yield curve in today’s Closing the Gap: Futures Edition segment. Using /ZB (the “Classic" Bond) and /UB (the Ultra Bond), Pete constructed a trade looking for short deltas at the far end of the yield curve.
Pete also defined the yield curve, and noted three important points:
A basic yield curve spread consists of buying and selling two different terms (durations) of a given bond. Instead of only trading the direction of interest rates, traders can utilize a spread strategy to speculate on the shape of the yield curve.
Traders can structure yield curve trades to be market neutral (also referred to as duration neutral). This strategy allows traders to capture changes in relative rates along the curve and not changes in the general level of interest rates. Since longer maturity bonds are more price-sensitive than shorter term bonds, traders do not buy and sell equal amounts of short-term bonds and long-term bonds.
While there are different ways to measure the price sensitivity of a bond, most traders use the measure DV01. DV01 measures the price change that a bond will experience with a 1 basis point change in interest rates.
Finally, Pete introduced a trade by selling the Ultra Bond future(/UB) and buying the classic Bond future(/ZB) to profit from a steeping of the yield curve at its extreme.
Check out the Treasury Yield Curve Resource Center
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