Strategy · Fixed Income

TREASURY CURVE FLATTENER

BearishDefined riskAdvanced

Overview

Short the 2-year (ZT) and long the 10-year (ZN) in DV01-equivalent size to bet on a flattening Treasury curve. Common ahead of Fed hike cycles.

Setup

1.Compute current 2s10s spread.
2.Calculate DV01 for each leg and size to be DV01-neutral.
3.Open the spread when fundamentals support flattening (Fed-hike expectations rising).
4.Set stop at 25bp adverse move in spread.
5.Take profit at target spread level (e.g., 0bp from +50bp entry).
6.Roll quarterly into new front contracts.

Max profit

Magnitude of curve flattening × DV01 × notional.

Max loss

Curve steepening would erode P&L; cap with spread stops.

Breakeven

Entry spread minus financing.

When to use

Before Fed-hike cycles or during late-cycle expansions.

When to avoid

When the Fed is cutting and the curve is steepening.