Trade to profit from a steepening yield curve
Question
You believe the gap between long-term and short-term yields is about to widen. How would you position yourself in the bond market?
Short answer
Buy short-maturity bonds and short long-maturity bonds, in duration-neutral amounts. A steepener gains when short yields fall relative to long yields. Weighting the legs so their dollar durations match removes exposure to a parallel shift, leaving a pure bet on the slope. The same view can be expressed with futures (long 2-year, short bond futures) or with swaps.
Adapted from Crack, Heard on the Street, Q3.10, p.34; question and answer rewritten by SelfMadeQuant.com.
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