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When Will the Steepening Stop?

by Frank Kaberna| Tips & Strategies

While “The Steepening” may sound like a Hollywood-produced thriller wherein an animated monster made of tea leaves terrorizes some unassuming small town, it’s in fact the increase in the spread between short-term and long-term interest rates.

This form of steepening, however, can be a beast in its own right: the gap between 2YR and 10YR US Treasury rates has gone from below 0.80% at the start of December to above 1.3% last week (its highest value since 2015).*

The Case for the 2YR

Most of the steepening seen in the yield curve has come from the fresh legs of the 10YR getting as far as 1.4% as the 2YR still sits near 0%. A case could be made for the 2YR finally waking up and taking part in some of the upside that the rest of the curve has witnessed in the last few months (Small 2YR Yield (S2Y) futures let traders directly access short-term rates).

The Heat is On (Small 2YR vs Small 10YR)

(Small 2YR vs Small 10YR)
Source: dxFeed Index Services (https://indexit.dxfeed.com)

The Case for the Flattener

Traders can also play the difference between 2YRs and 10YRs by way of the spread. This interest rate-neutral trade puts two parts of the yield curve together to speculate on their difference growing and contracting. Some flattening could be in order after this historic run of steepening.

The TUT Spread
 Flattener Steepener
+1 S2Y \ -1 S10Y -1 S2Y \ +1 S10Y

The everyday trader can choose to view this blockbuster event through the lens of bullish/bearish interest rate trades or steepening/flattening yield curve spreads.

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*Treasury yields (https:/treasury.gov) and index values (https://indexit.dxfeed.com/) taken on 2/25/21
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© 2021 Small Exchange, Inc. All rights reserved. Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information in this advertisement is current as of the date noted, is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Trading futures involves the risk of loss, including the possibility of loss greater than your initial investment.

About Frank Kaberna

Frank Kaberna is the head content strategist at the Small Exchange. He produces everything from brochures to videos that inform on the Small Exchange’s products. After earning a mathematics degree from the University of Michigan, Frank traded interest rates at the Chicago Board of Trade. He then worked on the tastytrade Network as a content producer and on-air talent before landing at the Small Exchange.

Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

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