In this article, we want to show you a trade in US government Bonds are debt instruments, which means they are a way of ... More. To make this trade, you need to understand and pay attention to the yield curve. Trading the yield curve is one of the most advanced methods.
Current yield curve in the US
The current picture of the yield curve in the US looks like this:
The individual What are interest rates in trading? When one party lends mo... More differentials between the different maturities of US government bonds are very small. The reason is that the US Federal Reserve has steadily raised What is interest? In finance and trading, interest is a fe... More rates in recent months. This caused an increasingly flatter yield curve.
Historical classification of interest rate differentials
In the following overview you can see where the current interest differential level is classified historically:
To explain the overview, let’s pick out the first line: Here, the interest differential between two-year and five-year US government bonds is shown. The current interest rate differential is only 0.11%. This value represents only 17% of the total range of interest rate differentials over the past 30 years. You can also see the development of this specific interest rate difference in the following chart:
Trade the yield curve
We have decided to use this extreme area for our trading. To do this, we anticipate a widening of the interest rate differential between the two-year and five-year US government bonds. Unfortunately, you cannot trade interest rates but have to resort to government bonds. In principle, interest and What are value stocks? A value company is a company that app... More are opposites. If the interest rises, the What is price? The price is the measure of the value of good... More falls and vice versa. If you want to trade the yield curve and speculate on an increase in interest rate differentials, then you can do that as follows.
We’re betting on the interest rate differential between the two-year and five-year US government bonds widening again. This can happen in 3 different ways:
- both interest rates are rising, but the interest rates of the five-year government bonds are rising more
- both interest rates fall, but the interest rates on the two-year government bonds fall more sharply
- the interest rate of the two-year government bonds falls and the interest rate of the five-year government bonds rises
From a current perspective, scenario 1 is most likely. However, we will benefit from every scenario.
Building the trade
To construct the trade, we must consider the inverse relationship between price and interest. It is worth noting that you can learn more about this topic in our course.
If the interest rate on five-year government bonds rises, the price is likely to fall. So we have to bet on falling prices. As a counterpart, we are betting on rising prices in the two-year government bonds and creating a What are trading spreads? In online trading, spread is the d... More trade, also known as the TUF spread.
Pay attention to special features
Unfortunately, it is not that simple as described above. Both A future is a contract between two parties to purchase a ... More contracts have different multipliers. In addition, both futures contracts have different What is price volatility? Volatility is the price fluctuatio... More. Due to all of these circumstances, it is necessary to determine an approximately similar IV-adjusted nominal value in What is a trade order? In trading, an order can be defined... More to carry out the trade in the correct ratio.
Our calculations use a ratio of approximately 3 to 2. We buy 3 futures contracts for the 2-year US government bonds and simultaneously sell 2 futures contracts for the 5-year US government bonds. In the pricing, the chart for this trade looks like this:
We currently want to buy this spread at 407 and are still waiting for the fill.
Crash as a bonus
Should there be a major How do stock markets work? A stock market is a financial ... More crash in the next few weeks or months, this trade is likely to benefit most. In the following chart, the last two crashes on the stock What are value stocks? A value company is a company that app... More are marked in red:
As a result, this trade is also a nice hedge for our What is equity? In accounting and finance, equity is the r... More investments in our Tradimo real Money is a generally accepted medium of exchange to buy and... More account, which currently stands at $126,000.
How can I quickly get notifications about such trades?
In our chat and signal community, you can immediately learn about our trades and discuss ideas and trades with us and other traders.