How do I construct a curve steepener trade?

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AcadiFi · Accepted Answer

A curve steepener profits when long rates rise more (or fall less) than short rates — widening the spread between the two. Construction involves being long short-duration bonds and short long-duration bonds, sized to be duration-neutral so the trade isolates slope rather than direction. For Harborview Capital expecting a bear steepener (long rates up sharply, short rates up slightly): buy 2-year notes, sell 10-year notes. Example: own $100M face 2y note (duration 1.9) — duration exposure 1.9 × $100M = $190M DV01 equivalent. To hedge duration, short enough 10-year notes to match $190M duration. 10y duration ~8.5, so short $190M / 8.5 = $22.35M face of 10y. If the curve steepens 25bp (10y rises 30bp, 2y rises 5bp), P&L: long 2y loses $100M × 1.9 × 5bp = $95,000. Short 10y gains $22.35M × 8.5 × 30bp = $569,925. Net profit roughly $475,000 on duration-neutral steepener. ```mermaid flowchart LR A[Expect
Steepening] --> B[Long Short-End] A --> C[Short Long-End] B --> D[Duration Match] C --> D D --> E[Isolate Slope] ``` Implementation choices: cash bonds (funding required), futures (2y vs 10y Treasury futures, capital-efficient), or swaps (2s-10s swap spread). Futures ratios don't always match cash-bond ratios — account for CTD duration and conversion factors. Roll yield and carry also matter: in a positively sloped curve, short-end is low-yielding and long-end is high-yielding, so carry is negative on the steepener, requiring the curve to move to earn positive P&L.

How do I construct a curve steepener trade?

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