Trading US Treasury Yield Curve

Real Money said:
Can day trade the ETFs like TMF, UBT, TLT, etc. Can get exposure to rate differentials that way. You can trade the rate spread intraday, but its a crowded trade and the ICS market takes liquidity from the outrights. You have to watch the butterflies IMO, but there is plenty of action in the spreads, especially on the back end of the curve. You have to remember that these are like bond indexes in that near and adjacent tenors across the entire fixed income market price to them.

You are hedging rate risk with duration when you trade these (DV01), which when long gives you exposure to a yield spread. A yield spread is a heavily leveraged carry trade, and a rate spread is the hedge for these positions in the cash market.

The market makers in bonds, stirs, commercial paper and the rest of it are using and abusing execution advantages and data access, prescience of news flows and more. They make markets in swaps, fixed income vol, and bank rate products, total return swaps, and securitized fixed income risk (ETFs).

I've traded the spreads and watched the books a lot. The 10s, 30s, ultra fly is a major thing to be aware of and watch. That's the spread of rate spreads, i.e. long BOB/short NOB. It's an art and a science, but the info is hard to come by and the pros don't talk much. Have to dig deep.
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which platform or brokerage do you use to watch the yield curve and the butterflies? I heard about butterflies on these yield curve but I don't know what I am looking for or exactly what they are.
 
Temujin79 said:
You sound like you know what you are talking about, could you give us a direction in terms of finding more learning materials or finding a specific group for chats and community? How did you learn to trade the yield curve?
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I studied the history of futures trading. The CBOT pit traders would talk about this stuff. Spread trading in futures is hugely important to understand, not only because the exchanges give performance bond offsets (SPAN margin credit), but because the spread market is more important than the outright market in many cases.

In order to understand the yield curve, you have to learn how speculative traders look at it. All the economists and market forecasters will do classic analysis on the curve, and compare all the economic indicators and historical relationships, but the most important thing to understand is the liquidity flows and market making going on here. I studied guys like Gary Phillips, Danny Riley, Borsellino, .. old school traders. I made sure to learn the lingo/jargon they would use.

Go here to find the spread ratios for futures.
https://www.cmegroup.com/trading/interest-rates/intercommodity-spread.html

This is an (old) chart of a butterfly and outright bond futures. The ratio is the differential of the futures contract notional values. This is long the 10s, 30s, ultra butterfly (grey) and the white line is the outright ultrabond contract. Even an idiot can see the relation.
Ultra vs Fly.png

Now, trading this fly would be called "trading the yield curve", but it's actually not so much different from an outright bond trade. Think about it like this. If you are short the ten year and the ultra bond contracts on a DV01 weighted basis, your blended duration exposure is approximately somewhere in between these terms. In other words, you are trading a synthetic (implied AND tradable) ZB contract AGAINST an outright position in ZB.

That's the key to understanding yield curve trading. The entire curve moves with the outright market and you can be long/short in-front of and in-back of a maturity by doing this. You can essentially create a synthetic bond, bill, or note, and trade it against an actual bond, bill, or note rate instrument. And the exchanges will give you the leverage to do it. Insane leverage...

Temujin79 said:
which platform or brokerage do you use to watch the yield curve and the butterflies? I heard about butterflies on these yield curve but I don't know what I am looking for or exactly what they are.
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I use IBKR for execution, and the API with Excel, and I also program models in thinkScript using TD Ameritrade. These are cheap ways to do it. There are many other more expensive software solutions ranging from professional to simple retail. I can program only so much so I use these two.
 
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Used to see TUT on Bloomberg but bucks are made on the right yield direction. For example, my plan is to long 5-10 ZT in Q4 and hold for 6 months to 1 year, much better return than buying a 2 year note auctioned last week at 4.625%. but I can be wrong on economic outlook and timing.
 
Real Money said:
I studied the history of futures trading. The CBOT pit traders would talk about this stuff. Spread trading in futures is hugely important to understand, not only because the exchanges give performance bond offsets (SPAN margin credit), but because the spread market is more important than the outright market in many cases.

In order to understand the yield curve, you have to learn how speculative traders look at it. All the economists and market forecasters will do classic analysis on the curve, and compare all the economic indicators and historical relationships, but the most important thing to understand is the liquidity flows and market making going on here. I studied guys like Gary Phillips, Danny Riley, Borsellino, .. old school traders. I made sure to learn the lingo/jargon they would use.

Go here to find the spread ratios for futures.
https://www.cmegroup.com/trading/interest-rates/intercommodity-spread.html

This is an (old) chart of a butterfly and outright bond futures. The ratio is the differential of the futures contract notional values. This is long the 10s, 30s, ultra butterfly (grey) and the white line is the outright ultrabond contract. Even an idiot can see the relation.
View attachment 317936
Now, trading this fly would be called "trading the yield curve", but it's actually not so much different from an outright bond trade. Think about it like this. If you are short the ten year and the ultra bond contracts on a DV01 weighted basis, your blended duration exposure is approximately somewhere in between these terms. In other words, you are trading a synthetic (implied AND tradable) ZB contract AGAINST an outright position in ZB.

That's the key to understanding yield curve trading. The entire curve moves with the outright market and you can be long/short in-front of and in-back of a maturity by doing this. You can essentially create a synthetic bond, bill, or note, and trade it against an actual bond, bill, or note rate instrument. And the exchanges will give you the leverage to do it. Insane leverage...


I use IBKR for execution, and the API with Excel, and I also program models in thinkScript using TD Ameritrade. These are cheap ways to do it. There are many other more expensive software solutions ranging from professional to simple retail. I can program only so much so I use these two.
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Interesting, I don't see immediately what the edge is you are trying to exploit, since you are retail I expect it's mostly longer term/directional?

The yield curve traders I knew would make their money from the bid ask spread.
 
trade4succes said:
Interesting, I don't see immediately what the edge is you are trying to exploit, since you are retail I expect it's mostly longer term/directional?

The yield curve traders I knew would make their money from the bid ask spread.
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Depends what you use it for. I trade a lot of things, but I always make sure I understand what is happening on the yield curve at any given time.

The butterflies and rate spreads have lower risk than the outrights (usually) and they are popular with swing traders. Duration spreads like these, aren't really liquid for day trading, but since they are so heavily traded, it's important to monitor them and reference their momentum and/or direction in relation to the trading in the rates market.

Sometimes I day trade TLT, and if I do, I will use the price action on the curve and in the outright to gauge the market strength and direction. Even if you don't trade the spread positions, they can be useful. The spread orders are taking liquidity from the market.
 
So I also have a related question: say someone buys the 2 year treasury at 4.83%, how often does he get pay? is it at the end of the 2 year? Or does he get pay per quarter? If so, is it interest only? and when does he get the full principal back?
 
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