Steepening Yield Curve Spread Trade

[killATwill]

Hi All. Rate traders, how would you go about balancing a steepening yield curve trade long ZQ short ZB?

 

[killATwill]

By "balancing" I mean calculating how the ratio of ZQ long to ZB short.

 

[killATwill]

*calculating the ratio of ZQ long to ZB short.

 

[maxinger]

Hello killer.

ZQ price 100, price per point 4200. total price 420K

ZB price 160, price per point 1000. total price 160K

so perhaps use
ZQ : ZB as 1:3

 

[killATwill]

Thanks @maxinger

Thinking the ratio needs to flip

Maybe something like 4ZQ:1ZB

Reasoning is ZB is much higher beta

 

[globalarbtrader]

Thanks @maxinger

Thinking the ratio needs to flip

Maybe something like 4ZQ:1ZB

Reasoning is ZB is much higher beta

Beta is measured vs the market. What is the market here?

I would use vol or duration. Both would give you about a 4:1 ratio once you've allowed for different contract size.

GAT

 

[Kevin Schmit]

Hi All. Rate traders, how would you go about balancing a steepening yield curve trade long ZQ short ZB?

If you really want to take this trade, use dv01. Current 30yr futures dv01 is $199.63. FF futures are always (except during expiry month) dv01 $41.67. So about a 4.8:1 ratio. The 30yr dv01 will change with price, CTD, etc., so you may want to adjust your ratio over the course of the trade.

Rates trading is very dangerous for those who don't know what they are doing. If you fall into that category, you should skip this trade.

 

[maxinger]

upper chart ZQ-3ZB = -385

lower chart 4ZQ-ZB = +232


the spread has been going down for quite sometime.
down momentum seems to have vanished.

 

[killATwill]

@globalarbtrader
Yes, your definition is accurate. My bad.

@Kevin Schmit
Thanks for your insight, calculation and perspective.

@maxinger
Thanks for sharing your charts.

 

[bone]

Hi All. Rate traders, how would you go about balancing a steepening yield curve trade long ZQ short ZB?

You really don't want to trade Fed Funds versus the 30 year future. Do twos or fives to thirties, or one year duration Fed Funds vs fives.

FF to 30's is just a monster convexity play that isn't practical - IMO you'd be MUCH better off just being long or short flat price instead of having on that particular spread. I mean - there's ten tics of slippage just in execution risk. And the hedge ratio is going to be so fluid that SPAN margin offsets are going to be minimal.

Here's the CME Treasury Spreads page. Click on the spread ratios and trading codes tab, then select Dec 2019 .

https://www.cmegroup.com/trading/interest-rates/intercommodity-spread.html