How do I structure a yield curve slope (steepener/flattener) trade?

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AcadiFi · Accepted Answer

A slope trade expresses a directional view on the spread between two points on the curve, duration-neutral to isolate the slope movement.

**Steepener** = long short maturity, short long maturity. Profits when long-end yield rises more than short-end (or short-end falls more than long-end).

**Flattener** = short short maturity, long long maturity. Profits when long-end yield falls more than short-end.

**Sizing (DV01-neutral)**:
- DV01 of 2Y ≈ $190 per $1M face (duration ~1.9).
- DV01 of 10Y ≈ $870 per $1M face (duration ~8.7).
- To offset DV01: for every $100M long 2Y, short $100M × (190/870) = $21.8M of 10Y.

This sizing ensures that a parallel shift in rates produces zero P&L; only curve SLOPE changes generate P&L.

Worked example: Sablefield Macro Fund expects 2s10s to STEEPEN from current 45bps to 90bps over 6 months (anticipating Fed cuts that flatten front but long end stays anchored).

Execute: Long $500M of 2Y Treasury futures (TU) + Short $109M of 10Y Treasury futures (TY).

DV01 long: $500M × 1.90 / 100 = $9,500 per 1bp.
DV01 short: $109M × 8.70 / 100 = $9,483 per 1bp. Match.

Scenario 1: 2Y drops 60bps (Fed cuts), 10Y drops 15bps (steepening of 45bps).
- Long 2Y P&L: +60bps × $9,500 = +$570K.
- Short 10Y P&L: +15bps × $9,483 (gain because yield dropped on short) — WAIT, when you're SHORT bonds and yields DROP (price rises), you LOSE. So short 10Y loses $142K from 15bps rally.
- Net: +$570K − $142K = +$428K.

Scenario 2: Curve flattens instead (2Y rallies less). You lose.

**Carry matters**: The 2Y-10Y trade usually has NEGATIVE carry when curve is upward-sloping — you pay repo on short 10Y and earn lower yield on long 2Y.

How do I structure a yield curve slope (steepener/flattener) trade?

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