Curve Steepener Trade

A curve steepener trade is basically a strategy to take advantage of an anticipated widening yield spread between short and long maturities, most often with U.S. Treasuries.

In most normal circumstances, interest rates increase with longer maturities. For example, a 5-year TSY bond that has a 3.0% yield, and a 30-year TSY bond with a 4% yield, have a 100 basis point spread as a norm. Should new reports indicate more positive business with potential inflation as a result, short-term rates may go down and longer-term rates would increase. In our example, the 5-year bond may get stronger, with yield lowering to 2.85%, while long-term bonds may soften, and rates may increase, to 3.10%. The new spread would be anticipated as 125 basis points.

A curve steepener trade might attempt to profit here, even by shorting the 30-year and going long on the 5-year. This could be done via derivatives or swaps, or by trading the actual bonds, depending on liquidity and portfolio size.

The reason it's called a curve steepener trade is because the yield spread between a short- and long-term maturity bond can be depicted graphically as two curved lines. The curve steepens as the yield on the longer maturity increases, hence the reference to “curve steepener.”

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