A Duration-Neutral 5s–30s Treasury Curve Steepener

Summary

The document identifies a proposed long-short Treasury swap position as a 5s–30s curve steepener. The position is long five-year exposure and short thirty-year exposure, with sizing intended to make the legs duration neutral. Its stated rationale is positive carry: if yields at both maturities stay unchanged, the relative financing and spread structure is expected to earn income.

The answer emphasizes that carry does not guarantee a profit. The position remains exposed to changes in the shape of the yield curve. For example, if monetary tightening pushes five-year yields up more than thirty-year yields, the long shorter-maturity leg can lose relative to the short longer-maturity leg. The document says that hedge funds and money managers use the trade and characterizes its recent performance as mixed, but provides no supporting performance data or detailed sizing method. Duration neutrality reduces a chosen exposure; it does not eliminate curve, basis, or other risks.

Key ideas

• The proposed position is a duration-neutral 5s–30s Treasury curve steepener.
• The trade is described as positive carry when both maturity yields remain unchanged.
• A relative rise in five-year yields can cause losses even when the trade begins with positive carry.
• Duration neutral sizing does not remove exposure to curve shape changes.
• The document reports mixed recent performance without providing supporting data.

Tags

# Does this trade have a name?


# Does this trade have a name?












Ok so I got this idea, it's very simple so I know I'm not the only one who has thought about it. It is a pairs trade between long and short term treasury swaps, and goes as follows:

> Going by current market rates: USD Libor is 92bps US 30 Year is 210 over libor US 5 year is 102 over libor Long 6 bonds of five year treasury swaps for every 1 short (More dynamic alteration) Long 1/beta bonds of five year treasury swaps for every 1 short T Bond swap 6 x 102 - 210 612 - 210 = 402 bps profit 4.02% ROI ---> profitable Earn the risk premium with less default risk. basis risk exists resulting in some volatility, but still hedges exposure to treasuries, leverage till you reach your volatility target.

It should yield a profit, I don't know whether banks, pensions, or HFs are already doing this. Maybe there is something obvious i'm missing as to why it won't work.

## Answer by dm63 (score 2, accepted)

https://quant.stackexchange.com/a/33241

This trade is called a 5s-30s Treasury curve steepener, duration neutral. It is positive carry i.e. if 5yr Treasury yields and 30yr Treasury yields remain the same, it makes money. However, there are scenarios where it loses money. For example, the Fed hikes, causing 5yr yields to rise substantially, but 30yr yields dont rise as much. Some investors are currently doing this trade (hedge funds, money managers). It has had mixed success recently.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.