Note Against Bond Spread - NOB

The names of debt securities issued by the U.S. federal government vary based on the length of the maturity. In raising kids, there are distinctions between babies, toddlers, and children. There are size differences between cars, vans, and trucks. And, along similar lines, treasuries are divided into bills, notes, and bonds.

The term "bills" refers to the short-maturity securities...anything with a maturity of a year or less. More medium-term items get the name "notes." We're talking maturities between two years to 10 years for these. Meanwhile, the long-term maturities (more than 10 years, with the 30-year security being the most famous) are known as "bonds."

The "notes versus bonds" spread has to do with arbitraging the difference between the medium-term issues (the notes) and the longer-term ones (the bonds). Specifically, its a strategy that involves taking opposing positions in the 10-year note and the 30-year bond. So...you might go long 10-year notes and short 30-year bonds. Or vice versa.

The goal is take advantage of changes in the yield curve...the difference in interest rates paid on securities with different maturity lengths. In other words, you set up a note-against-bond spread bet when you think the relationship between shorter-term rates and long-term rates will fluctuate in the near future.