Closing the Gap - Futures Edition

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NOB Spread Time For A Turn?

Closing the Gap - Futures Edition

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

The yield curve represents the yield on U.S. debt with varying maturities. The yield curve can be trade by purchasing/selling different debt products on the yield curve. One example is the NOB (Notes Over Bonds) spread, which is a pairs trade between the 10-year Note and 30-year Bond Futures.

Different bonds have different DV01 values, or duration. This represents how much the bond price should fluctuate with a 1 basis point move in the underlying interest rate. This was explained as the delta of a Bond. A hedge ratio must be calculated to get a DV01 neutral position in order to play the difference in yields.

Pete used a table to show how to use DV01 to create equivalent positions between Notes (/ZN) and Bonds (/ZB). He noted that the current ratio was 3:1 Notes over Bonds. How the NOB spread helps to gauge the current shape of the yield curve was discussed. A graph of the yield curve from June 2015 to present was displayed. What the yield curve indicates about economic expectations was explained, and a table laid out different strategies for different outlooks.

Pete introduced a bear spread futures ratio trade. Pete also mentioned using a defined risk trade using Bond and Note vertical spreads with futures options. These trades take up much less margin.

Watch this segment of “Closing the Gap-Futures Edition” with Tom Sosnoff, Tony Battista and Pete Mulmat for the valuable takeaways and better understanding of the NOB Spread and the yield curve.